Have you ever paid for your roof to be replaced? Ever?
We haven’t. We’ve lived in houses for 30+ years and never once have we paid for a new roof. Three times the insurance company has on our behalf. Never have the roofs been more than 13 years old.
The economics of home insurance don’t make any sense to me. I spoke with a lot of neighbors over the last few weeks – as we were making a claim for hail damage – and no one I spoke with has EVER paid for a new roof directly. Everyone has just had them replaced after storms and paid the relatively small deductible.
How do you make sense of these figures …
Our new roof I will cost $57.5K. We have a $2.5K deductible, so the insurance company is picking up $55K.
Our home insurance annual premium is currently $3.4K, but it’s gone up a bit in recent years. I’d estimate we’ve paid about $35K in premiums over the time we’ve lived in this house (almost 13 years).
That’s a $20K shortfall for the insurance company. Do they make that up with their investing prowess? And, cover their profit margins (2-3%)?
I guess they do. I looked at the insurance industry’s stock market returns over the last 10 years and it was identical (11.3% annual average) to the S&P 500 overall.
Still, maybe State Farm needs to cut back on their Aaron Rodgers deal until I at least get my roof finished!
Have you ever paid for a new roof yourself?
Image Credit: Pixabay
MrFireStation 
Chief, I have never replaced a roof under the hail damage circumstances you describe. I have lived in my house for over 33 years. I have had to have my roof tiles pulled one time to replace the underlayment for around $10K in 2000.
California has a different risk profile. Our big risks are wildfires and earthquake. State Farm palms the earthquake risk off on a state earthquake authority. State Farm is very active in mitigating wildfire risk as they visit our property and prescribe mitigation improvements such as removing the ivy from the front of my house.
I have been investor in Berkshire Hathaway for a long time, and Warren Buffett provides a good explanation of the economics of insurance. Most insurance companies do not make an underwriting profit. An underwriting profit is where the claims are less than the premiums collected. The profit margin is the investment returns on the float (the time that the insurance company holds your premiums, and gets to invest the funds until they pay it out).
I ran a Net Present Value Calculation on your scenario with the assumption that your initial premium was $1,745 in 2009 and ended at $3,400 in 2022. The initial premium of $1,745 would have been invested for thirteen years. The second year’s premium in the 2010, would have been invested for twelve years, and so on. A 7.25% return on the float covers your $54,000 loss exactly. Any return over 7.25% covers profit and overhead.
Note that State Farm is a Mutual Insurance Company, which is similar to a non-profit. Us insureds are their shareholders. During the Covid-19 pandemic, you probably received a check, which was State Farm disbursing their excess auto underwriting profit that was a function of everyone driving less.
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Wow – great analysis! Makes sense. I would guess they’ve done better than 7.25% in investments over the last 13 years. I guess that Aaron Rodgers campaign is paying off for them!
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In my case I have had 33 years without a claim. The area I live in is low risk for burglary and hail damage, but high risk for catastrophic wildfire. So they have kept and invested the bulk of what I have paid them over the thirty -three years, so my relationship with them has been high margin business, which would end instantly if my house burned down.
State Farm has been very proactive in trying to assure the best outcome as evidenced by them sending an inspector by and making stipulations on my landscaping and brush. They also gave me an arc fault detector called “Ting” which monitors the whole house for electrical problems.
Wondering if State Farm has made any sort of recommendations for better roofing materials, such as flat tile, which may be better hardened against hail damage?
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No such proactive ‘inspectors’ or suggestions from State Farm in MN. We had top-notch 40-year shingles. Standard is 20-year around here. Very few people have anything but asphalt shingles.
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I am midway through a presentation which I will be making at a Risk Management conference and one of my slides is a graph of the combined ratio (losses plus expenses/premium)of the insurance industry 1978-2020. I think only 4-5 years is the ratio below 100, meaning an underwriting profit. Many claims have a long payout profile, think medical malpractice and product liability. Homeowners and auto a short payout profile.
Like Klaus mentioned, outside of the Midwest and Southeast, roofs are not often damaged by nature, they wear out or in the case of tile, when the home is demolished.
I replaced a roof on a 2500 SF ranch single story in 2004 at a cost of $8,000. The original shake was torn off, plywood underlayment with asphalt 40 year shingles installed. I sold that house in 2017. The house originally built in 1962.
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I guess the Midwest is pretty storm-centered. One of our neighbors had their roof replaced last year and are now getting it replaced again!
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There was an interesting story with a lead in photo of single house standing in Mexico Beach, FL a couple years ago. One house standing and everything around him totally destroyed. The story explained that the owner wanted to be safe for any foreseeable hurricane and had an architect design accordingly. His roof was concrete with cables tying it into the foundation. His construction cost was 20% more than his neighbors.
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I always said to my son as he was growing up … “an extra 20% of effort makes 80% of the difference”!
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I’ve replaced four roofs in the last fifteen years. One on our former residence after living there for 14 years, and it was at least 15 years old when we bought it, so it was at least 30 years old. We’ve also replaced three rental property roofs during the same period. The two largest were 16 unit buildings (fairly large roofs), none of which were even close to your cost of $57k. Obviously, I don’t know your roof type, size, material or market, but that is a very substantial residential roof replacement cost. All of our replacements were asphalt shingles, so relatively low in cost. In our Mid-Atlantic area, it’s rare to replace due to weather. Replacement is typically due to age. I think I’ve mentioned before, that we accrue roof costs (along with other typical CapEx items for personal capital type items just like we do with our rental property businesses), so I’ve sold several homes and rental buildings with older roofs and carried forward those CapEx funds (ie. a better profit at sale because I get to keep those accrued funds). Sounds like you’ve been fortunate to always sell prior to replacing your residential roofs. That’s great, and you’ve been fortunate to sell and not need to expend the capital (ie. essentially a better “unrecognized” profit for you each time!) I currently have 14 years of roof accrual set aside for our current home. I believe that I accrue for 25 or 30 years (…sorry, I’m too lazy to get up and actually verify!), but I’m sure that I have roughly half of the replacement cost set aside as we built in this home 14 years ago. If needed, it’s there. If we sell before needing it, it’s available to roll forward or reallocate to something more fun. I don’t believe we’ve ever had a claim on our personal home policies. We have had one significant claim on a rental property a few years ago due to a hot water tank failure. It was a nightmare of a claim, but eventually got resolved. Maybe we’ve just been fortunate! 🤷 Best of luck with your insurance claim!
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Thom, your accrual model was actually the prompt for this post. I was thinking how lucky I’ve been to not have to accrue for an expensive roof job. My accrual would be about $5K/year. I don’t know anyone in MN or WI that has had to pay for one and every house we’ve sold has had a <5 year old roof. I’m waiting to see what will happen with our new townhouse, which is just 1/2 mile away, as the crow flies. The HOA was considering filing a claim for a 2020 storm, so I’m guessing they definitely will now. This storm had bigger than golf ball sized hail for about 10, hard minutes.
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…Wow that ended up being a long response! Sorry about that!
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