	Background

		Homeowners Insurance Policies

Homeowners insurance provides consumers with financial protection  against unexpected losses. Other structures. Personal property. Replacement cost. Homeowners Policies Typically Cover a Range of Perils

Homeowners insurance policies typically cover a range of perils and are  critical to providing financial protection against losses such as fire and  theft, among others. Losses that are not catastrophic. Homeowners Policies Also Exclude Other Perils

Despite covering a range of perils, insurers also exclude a number of  perils. Other risks are excluded because they could raise moral hazard issues if  they were covered and because they are not accidental. Second, they suggested that manufacturers  are responsible for defects in their products, and product warranties and  commercial general liability insurance can help affected homeowners. Policy Exclusion Impacts Could Be Reduced by Expanding Homeowner Coverage, but Premiums Would Likely Increase

Losses due to policy exclusions can financially impact homeowners by  causing significant out-of-pocket expenses. Expanded coverage could offer homeowners more  protection, potentially reducing the cost of repairs that homeowners would  have to cover with their own resources. Some industry participants said that excluded losses can  cause significant damage to homes and possessions. One industry organization  said that catastrophes can cause shortages of building contractors and  building supplies that can delay reconstruction. In addition, when some homeowners do not rebuild,  communities may experience a diminution of the tax base. Government Coverage of Excluded Losses Can Involve Costs and Risks to Taxpayers

Both the federal and some state governments offer disaster assistance  and other programs to help homeowners with some of the perils that  private insurers do not cover, and this support can rely on taxpayer as  well as policyholder resources. In addition to providing disaster assistance, the federal government also  offers flood insurance to homeowners through NFIP, a program that  involves significant costs for the government and ultimately for taxpayers. Assuming homeowners purchased expanded private coverage without  government subsidies, these policies could also reduce reliance on  federal and state programs. In addition to having benefits at the federal level, greater  private coverage could also reduce or eliminate the need for state-based  insurance mechanisms, such as state wind pool coverage, and the  insurer and policyholder assessments they can involve. Multiple Challenges Make Expanding Private Coverage Difficult

Several factors make it challenging for private insurers to offer all-perils  homeowners insurance, or even more comprehensive policies. A few industry  participants with whom we spoke said that insurers and others are  discussing possibilities for expanding private homeowners insurance, but  cautioned that policy premium rate, affordability, and other conditions  would need to be addressed. Two industry organizations said that mitigation efforts, effective building  codes, and sound land-use policies could also help reduce risks from  natural catastrophes. The catastrophic nature of flood and other natural catastrophe losses,  according to industry participants, may require a continuing role for  federal and state government in financing coverage. A mix of factors—financial risk, large potential losses,  political and regulatory issues, policy affordability, and consumer  demand—has thus far made it challenging for private-sector insurers in  the U.S. to offer flood insurance to homeowners, let alone more  comprehensive or all-perils policies. Addressing this  important challenge and ensuring a collective response to losses caused  by disasters and other perils will require the cooperation and resources of  government, homeowners, and insurers, as well as balance in the  assumption of risk and cost by each of these parties. Agency Comments

We provided a draft of this report for review and comment to the National  Association of Insurance Commissioners (NAIC) and the Federal  Insurance Office (FIO) at the Department of the Treasury. Both provided  technical comments which we incorporated into the report as appropriate. GAO staff who made key contributions to this report are  listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

In this report we examined (1) the perils homeowners policies typically  cover and exclude; (2) the impacts of exclusions on homeowners and  taxpayers and the potential benefits of more comprehensive coverage for  homeowners; and (3) the additional perils insurers might be willing to  cover and the challenges associated with such coverage. We reviewed documents by insurance industry  organizations and professional associations, including the National  Association of Insurance Commissioners (NAIC) and the Insurance  Information Institute (III).
Why GAO Did This Study

Homeowners insurance protects against a range of perils, but policies do not insure against all risks. Owners whose homes are damaged by natural and other disasters not covered by their insurance can be exposed to serious financial losses. Federal and state initiatives provide some assistance for catastrophes, which can involve significant taxpayer expense. With coastal populations growing and the possibility of more frequent and severe weather, more homeowners could experience heavy losses not covered by homeowners insurance, putting increasing financial pressure on government programs and thus on taxpayers.
GAO was asked to study the possibility of private insurers providing more comprehensive insurance. This report addresses (1) what perils homeowners policies typically cover and exclude, (2) how exclusions impact homeowners and taxpayers and the potential benefits of more comprehensive coverage, and (3) what additional perils insurers might be willing to cover and what challenges are associated with expanding policies. GAO reviewed homeowners insurance policies and conducted interviews with the National Association of Insurance Commissioners, other industry organizations, consumer advocates, and risk experts, among others.
GAO requested comments on a draft of this report from the Federal Insurance Office and the National Association of Insurance Commissioners. Both provided technical comments which we incorporated into the report as appropriate.

What GAO Found

Homeowners insurance policies typically protect homes, garages and other structures, and personal belongings from damage caused by perils such as fire, hail, lightning, explosion, and theft, among others. The insurance industry considers these perils insurable because they are accidental, predictable, and do not involve catastrophic losses. These policies also typically exclude losses from a number of perils, including disasters caused by floods, earthquakes, and war. Industry officials said that such events are difficult to predict and involve extensive losses that are a challenge for private insurers to cover. Insurers also exclude losses from defective products, which industry participants said could be addressed by manufacturer warranties and commercial general liability insurance. Intentional losses; damage from wear, tear, or neglect; and losses caused simultaneously by covered and uncovered perils, such as wind (covered) and flood (uncovered) during a hurricane are also generally excluded.
Policy exclusions can impact homeowners, communities, and state and federal governments. When excluded losses occur, they can create significant costs for homeowners to repair homes and replace possessions. Wide-scale catastrophes can also cause shortages of building materials and contractors that delay reconstruction and substantially increase the costs of repairing homes. When damage to properties caused by excluded losses is not repaired, affected communities may experience blight and face reduced tax revenue. When federal and state governments have stepped in to cover what private insurers exclude, taxpayers may face a significant expense. In addition to federal disaster assistance, the National Flood Insurance Program (NFIP) paid more than $7 billion in claims after Superstorm Sandy. In Florida, insurers and policyholders can be assessed extra charges to help pay for state efforts to cover wind damage where it is not covered by insurers. Industry participants suggested that expanded private coverage could provide additional protection for homeowners and reduce reliance on government programs, but the resulting policy premiums would likely be prohibitively expensive for many homeowners.
Multiple factors make expanding private coverage challenging and several conditions would need to be addressed for insurers to offer more comprehensive insurance. A main challenge is that expanded coverage would have higher costs, potentially limiting consumer demand. Even if insurers charged higher rates that were based on risk, the severity and unpredictability of catastrophic losses could still jeopardize insurers' solvency. Some industry participants said that insurers and others are discussing possibilities for expanding private homeowners coverage, with a focus on risk-based premiums, mitigation efforts, effective building codes, and sound land use policies. The challenging mix of financial risk, political and regulatory issues, policy cost, and consumer demand has thus far prevented private sector insurers in the U.S. from offering flood insurance to homeowners, let alone more comprehensive or all-perils policies. Because of this mix of factors, some in the insurance industry have suggested that a continuing financial role by federal and possibly state governments may be required, and that ensuring a response to the impact of disasters and other perils will require the cooperation and resources of government, homeowners, and insurers, as well as balance in the assumption of risk and cost by each of these parties.