Property and casualty insurance costs are moving from background expense to front-line credit issue. Rising premiums and shrinking availability are reshaping borrower financial health—and lender exposure.
Many expect higher costs to persist. The First Street Foundation forecasts roughly $1.5 trillion in net weather-related property losses over the next 30 years—uninsured losses borne by borrowers and lenders. Donald Sheets, lecturer in real estate at Harvard’s Graduate School of Design, told the audience at ProSight’s Annual Risk, Compliance, and Fraud Virtual Conference that “at least for the next three years, we will continue to see double digit price increases” in many residential and commercial markets—likely “much larger than banks and owners probably realize.”
At the same time, availability is tightening. “Coverages continue to be dropped in the housing and commercial markets, while competition continues to decrease in terms of where you can get quotes,” Sheets said.
Panelists flagged a few practical pressure points for lenders to focus on now:
Tighten insurance tracking and monitoring. Mike Dimas, senior vice president at Proctor Loan Protector, urged lenders to strengthen monitoring processes. “This is why it’s important to have good process and procedures built around the tracking and monitoring of borrowers’ insurance,” he said. Controls are critical, whether tracking is handled internally or by a third party. “The key here is to identify whether coverage is in place, and does it meet the requirements that are set upon that loan,” he said.
Dimas cited data sources from Fannie Mae and others for analyzing replacement costs and called for licensed property and casualty professionals to inspect properties. “We have an obligation to our community, our insurance community, that they are properly insuring from the start” and throughout the life of the loan, he said.
Educate borrowers on the real cost picture. Insurance and taxes now move independently of fixed mortgage payments. “Ten years ago, insurance was simple: I buy it, set it, forget it,” Dimas said, adding that these days many say “there’s no such thing as a fixed rate mortgage anymore,” as rising taxes and insurance drive monthly mortgage payments higher even as the interest rate stays fixed. He noted a “boom now in the home equity line of credit (HELOC) lending space” as borrowers tap equity to cover higher costs.
Watch the deductible trap. To lower premiums, borrowers may increase deductibles—sometimes without fully understanding the trade-off. “What does that really mean to the homeowner?” Dimas asked. Robin Ingari, executive vice president and executive credit risk officer at American Bank in Austin, Texas, warned that some borrowers “may not realize their deductible has increased.” A high deductible can be difficult to cover and can imperil a borrower’s ability to keep up with mortgage payments, increasing a loan’s credit risk.
As Ingari put it, in today’s market, “until something happens, you don’t know what you have.”
