While homeowners-insurance policy exclusions can burdenconsumers with significant out-of-pocket expenses, expandingpolicies to fill coverage gaps creates a new set of challenges,such as affordability issues, lower consumer demand as rates riseand regulatory approval for risk-based rates, the GovernmentAccountability Office says.

As coastal populations grow, and with the possibility of morefrequent and severe weather, the GAO was asked to study thepossibility of private insurers providing more comprehensiveinsurance that includes coverage for risks currently excluded.

The GAO, in a January report, says, “A main challenge is thatexpanded coverage would have higher costs, potentially limitingconsumer demand. Even if insurers charged higher rates that werebased on risk, the severity and unpredictability of catastrophiclosses could still jeopardize insurers' solvency.

Industry participants the GAO spoke with questioned whetherconsumers would have the appetite to pay the higher rates thatwould come with more comprehensive coverage. “Some said that mayhomeowners try to keep expenses for insurance as low as possible,citing as evidence low participation in [the National FloodInsurance Program], despite federal subsidies,” states thereport.

With low consumer interest, the report notes concern amonginsurers that they might be left with only the riskiest householdsin their insurance pool, which could jeopardize solvency.

Insurers also wondered how regulators would react to requestsfor more expensive risk-based rates for expanded policies. Aregulator questioned for the GAO report, though, said charginghigher rates might not be an issue since loss experience is acritical factor in setting rates.

The GAO explains that if insurers were to take on additionalrisks, they would also need to hold more capital. “Insurers may notbe willing to maintain the higher capital levels needed forinsuring against higher-risk events if that capital could be usedfor other insurance or investment purposes,” the GAO reportstates.

In order for insurers to offer expanded coverage, according tothe report:

• Insurers would need the ability to accurately model additionalrisks, which some industry participants said might already bepossible for floods and earthquakes.
• Consistent mitigation efforts, building codes and soundland-use policies would need to be developed to help reducenatural-catastrophe risks, according to two industryorganizations.
• State and federal government involvement may need to continuein some capacity to guard against the catastrophic nature of floodand other nat cat risks.

Summing up the obstacles, the GAO says, “The challenging mix offinancial risk, political and regulatory issues, policy cost andconsumer demand has thus far prevented private-sector insurers fromoffering flood insurance to homeowners, let alone morecomprehensive or all-perils policies.”

But while challenges exist, the GAO recognizes the impact thatcurrent policies can have on homeowners, stating that losses due topolicy exclusions can have significant financial ramifications forconsumers. “Communities can also be impacted by perils excludedfrom homeowners policies, particularly if unrepaired homes resultin blight and affect whether others in a neighborhood rebuild,”says the GAO.

“Expanded coverage could offer homeowners more protection,potentially reducing the cost of repairs that homeowners would haveto cover with their own resources.”