To self-insure or not? That is a question with some complicated answers

A recent survey by the Insurance Information Institute found more Floridians are turning their backs on insurers and, instead, self-insuring their homes because of the rising cost of their premiums.

Industry analysts estimate 15%-20% of Florida homeowners are now self-insuring, which is double the national average of 7% and up 2% from last year. In 2016, 8% of Florida homeowners did not have coverage.

Self-insuring means you don't have an insurance policy to protect your property, which can be a frightening thought.

Instead, the theory is you save what you would pay in premiums in an investment account that you can access, and then you pay for any potential repairs out of pocket.

For example, if your insurance premium is $5,000 a year, you could pocket that money for the next 10 years instead and have enough to cover a new $30,000 roof when the time comes for replacement and still have $20,000 (plus interest) left over.

In a perfect world, that would be fine. But what happens if a hurricane strikes or an electrical fire ignites within those 10 years, and your roof needs immediate replacement or the entire home? There is no security blanket waiting for you.

"It is very risky for homeowners to self-insure," said Tasha Carter, Florida's Insurance Consumer Advocate, in recent interviews for Central Florida TV stations WESH (NBC) and WKMG (CBS).

Not only did she mention a hurricane or fire that could wipe out an entire home, but also the liability factors in case someone was to be injured on your property at your fault. Most homeowners just don't have the available funds to be able to cover a catastrophic loss," she said.

Alejandro Perez Duque, director of PVG Insurance Group on Key Biscayne, said, "One of the interesting and concerning things that we have seen in the last 12 months is the increasing claims worldwide from what are called secondary perils, such as brush fires."

He said to look no further than what happened this summer with the fires in Lahaina, Hawaii, in an area one would assume would be more prone to hurricanes or floods.

"One realizes that major life-changing losses can happen anywhere and without much warning," he said. "This is why a prudent self-insurance strategy needs to take into consideration not only the expected risks and perils but also the unexpected."

In Florida, you are not legally required to have a homeowners insurance policy, even a basic liability plan. But, unless you own the home outright, most lending institutions will require insurance coverage, including flood (if in a flood zone), to protect the collateral securing the loan.

"If there is one item of risk that I would never recommend self-insuring is liability, particularly in South Florida, where the lawsuits and settlements are record-breaking," Perez Duque said.

According to the Insurance Information Institute study, Florida's home insurance is the highest in the country at an average of $6,000 per year versus the U.S. average of $1,700 per year.

Perez Duque said the "essence of insurance is to transfer risk to the insurance company," at least the important (and most expensive) risks.

"Self-insurance, when done correctly, is not the absence of insurance but, instead, a tailor-made strategy where you are selective (wind, fire or flooding, for example) on the retention of risk. ... It is truly a very personal decision where one size does not fit all (and lenders have to agree to the strategy)."

In Florida, he said, property owners are opting more toward "an increase in self-retention of windstorm risk rather than not insuring wind perils at all" due to the severity of hurricanes and mortgage requirements.

Duque added some banks are becoming more flexible in allowing homeowners with mortgages an option to take a higher deductible or to retain a larger part of the windstorm risk, but he's not seen any lender waiving windstorm coverage altogether.

Carter suggested other options homeowners should consider instead of self-insuring, including:

- Bundling insurance policies;

- Increasing the deductible;

- Looking for discounts (such as a home security system or impact-resistant windows).

According to the Insurance Information Institute, in the five-year period from 2017-2021, 5.9% of all insured homes had a claim, with wind and/or hail accounting for 3%, followed by water damage and/or freezing at 1.6%.

In 2021, 97.7% of homeowners' insurance losses were related to property damages, while 2.3% were liability issues (average loss of $31,663).

Of the property damages, 39.4% were related to wind and/or hail (average loss of $12,913), 23.5% to water damage and/or freezing (average loss of $12,514), and 24.8% to fire and lightning (average loss $83,519).

So, the next time you think about possibly wanting to self-insure your property, know that just one lightning bolt stands between you and peace of mind.

To insure or self-insure? That right there might be the real answer.

Homeowners Insurance Claims Frequency

According to the Insurance Information Institute (in a 5-year study between 2017 and 2021), each year:

- About one in 20 insured homes has a claim.

- About one in 35 insured homes has a property damage claim related to wind or hail.

- About one in 60 insured homes has a property damage claim caused by water damage or freezing.

- About one in 385 insured homes has a property damage claim related to fire and lightning.

- About one in 625 insured homes has a property damage claim due to theft.

- About one in 1,670 homeowners policies has a liability claim related to the cost of lawsuits for bodily injury or property damage that the policyholder or family members cause to others.