Market Focus: Insurance Replacement: Claims are predicted to continue to rise - Apr 2018
By Darius Helm
In recent years, independent residential flooring retailers have been struggling against competition from home centers and e-commerce-and against consolidation-and many have found success, albeit hard-fought, by diversifying their products and services, like competing in the commercial arena, adding new flooring categories or non-flooring products like window treatments and countertops, and introducing cleaning and maintenance services. Another revenue stream worth consideration is insurance replacement work, a steady gig that by most accounts is poised for solid growth for the foreseeable future.
Every year, close to 6% of insured homes have a claim, and 97% of those claims are for property damage. Wind, hail, freezing and other water damage make up the bulk of the claims. Average total claims of nearly $10,000 focus on flooring and subfloors, as well as walls and roofs, particularly when the damage comes from storms. However, while extreme storms like last summer’s hurricanes led to millions of dollars of flooring claims, most water damage tends to come from typical storms and pipes freezing-which happens steadily, year in and year out-and a lot of those damages center on flooring. Fire damage claims are more rare but also more catastrophic and expensive.
First and foremost, insurance replacement is a service business, which is great news for independent flooring retailers, who have seen the value of their service and expertise diminish in the face of low-cost providers like home centers and online stores. Home centers have tried getting into the business, but they’re not set up to service the client. It requires expertise in estimating, advanced product knowledge and a patient, compassionate demeanor. After all, home damage is upsetting, an upheaval of sorts, even if it’s just a busted pipe. And it’s immeasurably worse when suffering severe damage from hurricanes and other extreme weather events.
All retailers do some form of insurance replacement work, though it’s often only at the tail end of the process, when homeowners spend their cash-outs. But the ones that really know the business tend to be members of CCA Global’s buying groups, like Carpet One and Flooring America.
For years, CCA Global has essentially offered a full-service, turnkey flooring option for insurance companies. It partnered with all the big insurance providers, and it trained retailers that opted into the program on everything they needed to know, from loss estimating with Xactimate, the Web-based estimating tool widely used by insurance adjusters, to being sensitive to the needs of its stressed-out clients. And these retailers became preferred providers to the insurance companies.
There are also unaffiliated flooring retailers that become preferred providers to insurance companies, though there’s an approval process, and they often have to go through a third party (e.g. Contractor Connection) to join a program.
This model of using qualified contractors dates back about 15 years. Before that, homeowners had to go through the system of getting three estimates and accepting the lowest price. Then USAA, which specializes in serving the military, started working with contractors in programs with structured pricing on labor and materials-labor estimated as a market average and material sent to Itel, which all the insurance carriers use to identify materials for claims. Itel, based in Jacksonville, Florida, tests, identifies and categorizes all materials, including flooring, in all their details, and recommends products that match the specs and price points.
All of the major insurance carriers offer qualified contractors, including flooring retailers, for customers to work with on replacing their damages. However, the trend over the last several years-and it’s hard to say how much this is driven by the insurance carriers versus their cash-strapped clients-has been to focus more on assessing the loss and giving cash pay-outs to homeowners.
Pay-outs tend to yield lower margins, and some retailers that are preferred providers to insurance companies report that this trend has cut their insurance replacement business in half. And it doesn’t look like insurance carriers will be changing their strategy any time soon. Their priority is to keep their clients, and that means keeping them satisfied. And it looks like simplifying the claims process and putting cash into clients’ hands achieves their goals.
Retailers that serve this market often have a dedicated department and staff, since it requires specialized expertise, including using Xactimate software. And some generate the bulk of their revenues from insurance replacement work. However, traditional flooring retailers are not the only ones in this market. In most cases, restoration companies are first on the scene to do water mitigation, remove mold and basically eliminate the damage. While most outsource the flooring replacement to local retailers, some have turned to doing it themselves. In fact, many flooring manufacturers have started selling direct to these businesses.
Restoration firms, many of which started out as carpet cleaners or janitorial services, have formal relationships with insurance carriers. And those that don’t do the flooring replacement themselves will tend to farm it out to select flooring retailers. So creating relationships with restoration firms is another way for retailers to capture this revenue stream.
The commercial flooring claims business operates differently, in part due to the size of claims, with even smaller commercial claims easily running over $100,000 and even into the millions, compared to more like $5,000 for the average residential claim, and in part because commercial business is much more complicated, with more stakeholders. And the process will likely involve senior claims adjusters, and restoration firms or general contractors will submit bids to insurance firms and clients.
Many restoration firms, like Apex Disaster Management, located on the outskirts of Atlanta, Georgia, serve both the residential and commercial sectors. In the case of Apex, which was formed five years ago by partners with a background in water mitigation and other restoration services, the residential market accounts for the majority of its business. The firm does everything from water damage clean-up to replacing materials. Because the firm specializes in water damage, most of its replacement work is in drywall and flooring. Distributor partners supply its flooring needs.
As is the case with CCA Global, a major emphasis in Apex’s business is on the needs of the homeowners and business owners, and that includes being understanding with clients staring down damage to their homes.
CCA Global puts a lot of emphasis on being sensitive to the needs of homeowners facing down damage and losses, and it does a lot of training on communication skills. This focus on care is particularly essential when it comes to the growing population of seniors aging in place.
The oldest Baby Boomers are in their early 70s, while the youngest are well into their 50s, accounting for 76 million people, or nearly a quarter of all Americans. Aging brings with it frailty, vulnerability and anxiety-not to mention, for many seniors, a growing intractability as they become increasingly set in their ways. And that can elevate property damage from busted pipes, storm damage and fire into a real crisis. So it couldn’t be more different from servicing a client looking for a flooring upgrade. And if retail associates aren’t prepared for this or don’t have the training and disposition to handle it, they’ll leave in their wake a debris field of wrecked relationships and damage to their own reputations.
Apex operates within a 75-mile radius of Atlanta, mostly focusing on the residential market. Most of its revenues come from isolated claims, but business surges when a storm moves in. For instance, a major freeze in 2014 led to around 13,000 frozen pipe claims, according to Jim Clarke, president and co-founder.
Targeting the insurance replacement market can be a source of steady, reliable business, but when a major storm comes through, it can be explosive. Severe storms, like the three hurricanes to make U.S. landfall last year (Harvey, Irma and Maria), generate huge demand for new flooring. Some retailers and restoration firms from all across the country make it their business to race to the stricken area while others, like Apex, avoid such ventures and instead stay behind to mop up the extra claims business in their region not captured by the operations that left town.
Ohio Valley Restoration (OVR), located in Fairfield, Ohio, will send teams to hurricanes and flooding events, if it can spare them. OVR has been around for more than 30 years, and it has seen how easily local firms can be overwhelmed by major storms. When it comes to the actual flooring replacement, OVR works with flooring retailers.
Flooring producers will also track these events, so that they can manufacture extra product to serve the needs of the region. And some retailers located within the cone of these natural disaster areas will reach out to customers vacillating on a project to inform them that if they don’t make a decision immediately, the crush of work in damaged homes could mean that it will be weeks or months until they can do their project. Apparently, this can spur a lot of deals.
Discussions on profiting off the misfortunes of others can sound a little shady-more so in the case of retailers leveraging storm work to close deals-but there’s nothing unethical about getting a team together and driving cross-country to the site of a major storm or fire. Look at it this way: the faster you hustle and the more money you make, the sooner you return your clients to their normal lives. So speed does matter.
The fact is, flooring claims from major storms can really move the needle on a retailer’s business, particularly if the retailer understands insurance claims and has relationships with carriers or restoration firms. The flooding of Houston, for instance, has led to a tidal surge in business for retailers in the region, with much of the work still ongoing.
That’s the thing about these weather events, though. Flooring business doesn’t pick up immediately after. In fact, it’s one of the last interior elements to be replaced. First come the roofs and windows and structural issues, walls, water mitigation, mold removal, restoration of electricity and plumbing (if necessary), drywall and more-and at the end of that long list, flooring. And the more severe the storm, the longer the process takes. For instance, Harvey stalled when it hit the Texas coast, creating mostly a flood event in Houston, enabling teams to get onsite fairly quickly to start assessing damage and replace damaged materials, while in Florida many affected by the hurricane faced more extensive damage to their homes and a longer recovery.
Hurricane Harvey was a disaster for Houston (and much of the region) not only because it stalled and dumped so much rain, but because Houston, the fourth largest U.S. city, with a population of six million, is largely paved over. There’s nowhere for water to drain. The storm damaged over 200,000 homes, most of them in the Houston area. And nearly 13,000 were totally destroyed. And most of those casualties of the storm had no flood insurance; many of those required to carry flood insurance because they were located on flood plains had let it lapse, but the larger problem was that Houston’s flooding went well beyond the flood plain into parts of the city where flood insurance was not required.
Most of Houston’s homes don’t have basements. They’re built on concrete slabs, so even minimal damage probably includes the flooring. If only a quarter of the damaged homes required new flooring, and at a conservative 500 square feet per house, that’s still 25 million square feet of flooring. And that was just Harvey. In Florida, Hurricane Irma’s massive winds played a role in damaging tens of thousands of homes. And Puerto Rico was devastated, with over 300,000 homes with significant damage.
FLOORING AND WATER DAMAGE
When it comes to salvaging flooring, only clean water flooding counts. Water with even a minute amount of effluence is held to pose too high a risk. Water temperatures also matter. Hot or warm water is quicker to affect the integrity of a flooring installation than cold water. Among all types of flooring, water remediation needs to be done promptly and thoroughly, before mold gets a foothold, leading to a new set of problems.
If moisture can be removed fairly quickly, a wide range of flooring can be saved. All forms of vinyl tile are essentially waterproof, though adhesive systems can fail. Sheet goods don’t fare as well as tile, with felt-backed sheet more vulnerable to water and mold issues than glass-backed sheet.
Ceramic tile can withstand just about anything, including water, hot or cold. However, the weak point for ceramic tile is its installation materials, which are nowhere near as durable as the tile itself. For instance, grout that isn’t perfectly sealed can allow moisture to penetrate to the thinset layer and subfloor underneath. And ceramic tile installations can be more challenging when it comes to removing moisture. If there’s access from underneath, restoration firms will often cut a hole for water mitigation. And while ceramic tile itself will always survive, it’s useless with grout and mortar adhered to it.
Hardwood can often be saved if the issue is resolved fairly quickly, but if it gets saturated, solid hardwood will cup. And while sanding down the cupped edges can restore the floor, those thinner edges can theoretically impact the product’s integrity. It’s a somewhat different story with engineered flooring. Its construction affords more planar stability than solid hardwood, so it resists cupping; however, expansion through moisture absorption can put pressure on the adhesive holding the layers together-and it can take months before that kind of damage manifests. And if engineered hardwood does cup, sanding it down may well end up removing the top veneer. Also, many modern hardwood floors have surface textures, so they really can’t be sanded at all.
In the case of carpet, while hot water losses can delaminate a latex backing, it can survive cold water flooding if it’s caught in time. The carpet can be detached and fully dried, the pad replaced, and the carpet restretched.
Laminate flooring, with its high-density fiberboard core and multilayer construction, is particularly susceptible to moisture if it can get past its durable top surface. But once that core expands, it’s all over. However, it’s worth noting that laminate manufacturers, faced with competition from a raft of waterproof products and driven by consumer demand for pet-proof flooring, are moving quickly to seal joints and otherwise improve their product’s water resistance. Some have even replaced the fiberboard core with waterproof alternatives.
The same is true for carpet. Both Shaw and Mohawk have carpet lines that are latex-free, and other mills are also starting to go down that path.
However, it’s worth noting that most flooring products and installations will fail if they sit in water long enough. And as soon as bacteria and mold creeps in, it’s all over.
WHAT THE FUTURE HOLDS
For the foreseeable future, all signs point to growth in the insurance replacement market. There are four main reasons claims are going up. One is simply that people have more expensive possessions than in the past-so the same storm will cost more now than it did years ago-and that trend is expected to continue. Another is that homeowners are increasingly moving to coastal locations, where storm damage is typically higher-and they’re also moving to fire-prone areas, like California and the Pacific Northwest.
Also, global warming is heating up the oceans, and water expands as it warms. Sea levels are currently rising each year by the width of two nickels, and that’s likely to accelerate. Seas could be two feet higher by the end of this century. Two nickels per year may not sound like much-surely beaches and sea walls can handle that!-but consider how that translates in volume across a massive body of water being pushed ashore by a storm. Those fractional increases quickly translate into tidal surges that can overrun sea walls and decimate coastal communities.
And finally, there’s compelling evidence that storms themselves are getting stronger, and it’s looking likely that climate change is driving this trend. A warmer planet rains more, explains Robert Erhardt, Ph.D., a professor at Wake Forest University specializing in measuring environmental risks, studying impacts of climate change on these risks and exploring possible insurance solutions. As the earth heats up, there’s more evaporation, which leads to more precipitation, increasing the intensity of storms.
Flood insurance is already problematic. Almost all flood insurance is provided by the government through the National Flood Insurance Program. The program is already constantly on the verge of going under. And it buys reinsurance from major providers like Munich Re to give itself coverage in case it can’t cover the cost when big floods hit. And reinsurance companies set rates based on the risk they face, determined using the best science and most accurate predictive tools.
Scientists like Erhardt are increasingly making it their business to help actuaries and risk managers better understand the critical findings of climate science in order to successfully navigate through potentially turbulent times in the coming years.
Insurance is something people always grumble about. Hedging against risk is one of the more frustrating facts of modern life, and it’s hard not to sometimes feel that insurers are essentially turning fear into profits. But it turns out that the insurance industry has historically played a fundamental role in guiding the development of modern civilization.
Who would have thought, for instance, that the insurance industry created fire departments? It started back in the early 1800s with private fire departments run by insurers-a shield nailed to the front door would indicate houses covered by fire insurance. But it was an unsustainable model. For one thing, there was the issue of fires spreading through a whole city block just because the home where the fire started wasn’t insured and therefore wasn’t protected. Before long, the model evolved into public fire departments.
The insurance industry was also behind other critical concepts that serve to help stabilize the foundation of modern society, like auto safety testing protocols and building codes.
And when it comes to these increasing risks from mega storms and tidal surges, and extremes of heat and cold, the insurance industry could play a crucial role in the development of systems to reduce risks and prevent catastrophic losses.
Copyright 2018 Floor Focus