Why can’t I get renters insurance right before a storm?
When things are going well, it’s easy to forget to prepare for the worst. But when it comes to renters insurance, waiting until you realize you need a policy might mean missing your chance to get it in time.
If there’s a storm making its way up the coast, for example, or a wildfire threatening your neighborhood, a renters insurance policy might suddenly seem like a great idea. Unfortunately, some renters insurance companies won’t sell you a new one—or allow you to make adjustments to your existing coverage—if you live in an area facing imminent danger.
So why is this the case?
In short, it’s because insurance is designed for people to share potential risks—and certain, imminent risks like natural disasters aren’t taken into account. In this post, we’ll get into what risk distribution means, and how insurance companies determine when to stop issuing policies.
What does it mean for insurance to “share risk”?
Let’s say that you have $10,000 worth of stuff in your apartment, and that there’s a hypothetical one in ten chance that random event (like a storm or fire) will damage all of it this year. If you were to get unlucky, and that random event occurred, you’d pay $10,000 to replace all of your things out of pocket.
Now, let’s say you have nine friends, each of whom also have $10,000 worth of stuff, and the same one in ten chance that it’ll all be destroyed this year. Instead of taking that risk on alone, you decide to each put $1,000 into a shared pot, and agree that all of the money will go to the unlucky person when they need it.
You’d each essentially be out $1,000, but you’d also be buying yourselves $10,000 worth of protection. So if it were you who lost all of your things, you’d be in a much better situation than if you had to pay the entire replacement cost out of pocket.
Insurance protects you in a similar way. You periodically pay your insurance provider a fee, with the understanding that they’ll be able to pay you a much larger sum if things go wrong. Of course, insurance is much more complex than the example above, and insurance policies are subject to certain restrictions and conditions. And for it to work, the risk must have some degree of randomness, with each person’s likelihood of suffering a loss roughly the same.
The law of large numbers insurance model breaks down when loss goes from a potential risk to a near statistical certainty, and it’s even less effective when a given circumstance is likely to impact multiple people. Going back to our ten-friends-sharing-risk example, let’s say that you and your nine friends all live on the same stretch of coastline, and there’s a hurricane making its way toward you.
Suddenly, the chances that any one of you will suffer damages is much greater than one in ten. If you’re all hit by the storm, that $10,000 will only be enough to cover one person’s losses—rendering the entire plan ineffective.
How does risk sharing work with insurance companies?
Given that insurance only works with a certain degree of randomness, you might be wondering how an insurance provider can insure against hurricanes at all. After all, we know that some areas are more hurricane-prone than others, and that people who live in those areas are more likely to be hit than those living inland.
That’s why it’s important that insurance providers are able to diversify, or distribute their risk, and don’t just cover one specific area. While it’s possible that you and your neighbors may all have coverage through the same insurance provider, you only make up a fraction of that provider’s customer base—and the majority of the rest won’t be vulnerable to the same risks.
Insurance providers take all of this into account when pricing policies. They model the risk of a certain event happening in a certain period of time in a certain place, and use that to determine how much to charge in insurance premiums.
When a major storm is imminent, the chances of damage are so high that an insurance provider would have to charge an exorbitant amount to balance the risk. Rather than doing this, insurance companies can issue a moratorium (a temporary halt on the sale of new policies and policy changes) until the storm has passed.
How do insurance companies decide when to issue a moratorium?
In the case of hurricanes, insurance providers generally rely on NOAA’s five-day forecasts to determine which areas are likely to be hit by a storm. At Jetty, for example, we typically stop all policy sales and adjustments when an area’s chance of tropical storm force winds exceeds 40-50 MPH in the next five days.
With these forecasts, “location” is as specific as individual ZIP codes. This means it’s possible for residents in one neighborhood to be included in a moratorium, while those in a neighborhood a mile away are still free to purchase and adjust policies.
What if you move while there’s a storm moratorium?
Even if you just moved into a new home, you won’t be able to purchase a policy during a moratorium. That being said, you can secure a policy before your move, to avoid being in this situation.
WIth Jetty, you can purchase a policy up to 60 days in advance of your move-in/policy start date. If you plan ahead, you won’t have to worry about an insurance moratorium preventing you from getting covered—regardless of the weather conditions when you arrive.
Can other weather events trigger an insurance moratorium?
In general, insurance moratoriums are triggered when a large area is almost certain to be subject to extensive damage. Hurricanes are the classic example of this kind of threat, but wildfires and large blizzards can cause damage on a similar scale and may also trigger insurance moratoriums.
Ultimately, the key to protecting your things is making sure that you’re covered well in advance of any imminent threat. Then, if and when a storm is headed your way, you can focus on preparing and staying safe—with the knowledge that you already have a policy in place.