Homeowners insurance provides consumers with financial protection against unexpected losses. Most homeowners policies provide a package of coverage that protects against damage to different types of property and liability for injuries and property damage policyholders cause to others. The following are the main types of coverage: Dwelling. Pays for damage to a house and to attached structures, including plumbing, electrical wiring, heating, and permanently installed air-conditioning systems. Other structures. Pays for damage to fences, tool sheds, freestanding garages, guest cottages, and other structures not attached to the dwelling. Personal property. Pays for the value of personal possessions, including furniture, electronics, appliances, and clothing damaged or lost even when they are not on the subject property—for instance, when they are in an off-site storage locker or with a child at college. Loss of use. Pays some additional living expenses while a home is being repaired. Personal liability. Pays for financial loss from lawsuits for injuries or damages to someone else. Medical payments. Pays medical bills for people hurt on the property or by a pet. Homeowners can purchase several types of insurance policies. These policies differ based on the perils they cover (see table 1). For example, named perils policies insure against losses caused by perils that are specifically listed in the policies. Open peril policies are broader policies that insure against losses caused by all perils, except those that are specifically excluded. However, according to industry participants with whom we spoke, currently no homeowners policies are available that cover every possible peril a homeowner could face. In addition to different policy types, homeowners may choose between three different levels of coverage for their homeowners policies. These options are: Actual cash value. This type of coverage pays to replace the home or possessions after deducting for depreciation. Value is determined by taking into consideration the age of the home and wear and tear. This level of coverage may not be enough to fully repair or replace the damage. Replacement cost. This type of coverage pays the cost of rebuilding or repairing the home or replacing possessions, up to the coverage limit, without a deduction for depreciation. It allows for the repair or rebuilding of the home by using materials of similar kind and quality. Guaranteed (or extended) replacement cost. This option is the most comprehensive and expensive. It pays a certain percentage, typically 20 to 25 percent, over the coverage limit to rebuild the home in the event that materials and labor costs increase as a result of a widespread disaster. The HO-2, HO-3, and HO-5 policies typically provide replacement cost coverage on the structures. Contents coverage under homeowner policies is typically provided on an actual cash value basis, unless the replacement cost option is purchased. The HO-8 typically provides coverage for older homes on an actual cash value basis. Full replacement cost policies may not be available for some older homes. Several factors affect the premiums consumers pay for their homeowners policies, including the type and characteristics of the home. For example, homes that are primarily brick or masonry typically have lower premiums than wood frame homes, and older homes and homes in poor condition tend to have higher premiums than newer homes and homes in good condition. A homeowner’s characteristics, such as a history of filing claims, and choices, such as the dollar amount of coverage selected, may also impact the premium cost. Other factors that impact the premium cost include the degree of exposure to catastrophes (such as hurricanes or earthquakes), the type of protection devices in the home (such as sprinkler or security systems), and the type of structures on the property (such as swimming pools or trampolines). In addition to paying premiums for their insurance policies, homeowners generally have to pay a deductible when they file a claim—that is, an amount of money a policyholder must pay before an insurance policy will pay for a loss. The deductible applies to both home and personal property coverage and is paid on each claim. Higher deductibles generally mean lower policy premiums. In some locations, there are also catastrophe deductibles that a homeowner must pay when a major natural disaster occurs. They are expressed as a percentage of a claim instead of an insured amount. Insurance in the United States is primarily regulated at the state level. State insurance regulators are responsible for enforcing state insurance laws and regulations, including through the licensing of agents, the review of insurance products and premium rates, and the examination of insurers’ financial solvency and market conduct. The insurance regulators of the 50 states, the District of Columbia, and the U.S. territories created and govern the National Association of Insurance Commissioners (NAIC), which is the standard-setting and regulatory support organization for the U.S. insurance industry. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer review, and coordinate their regulatory oversight. NAIC staff supports these efforts and represents the collective views of state regulators domestically and internationally. NAIC members, together with the central resources of the NAIC, form the national system of state-based regulation in the United States. Insurers assume some financial risk when writing policies, but also employ various strategies to manage risk so they can earn profits, limit potential financial exposures, and build the capital needed to pay claims. For example, insurance companies establish underwriting standards, such as refusing to insure customers who pose unacceptable levels of risk, or limiting coverage in particular geographic areas. Insurance companies may also purchase reinsurance, or insurance for insurance companies, to cover specific portions of their financial risk. For catastrophic losses, insurers may also sell financial instruments such as catastrophe bonds. Reinsurers use similar strategies to manage their risks. Both insurers and reinsurers must also predict the frequency and severity of insured losses with some reliability to best manage financial risk. In some cases, these events can be fairly predictable. For example, the incidence of most automobile claims is predictable, and losses generally do not occur to large numbers of policyholders at the same time. However, some infrequent events, such as hurricanes, are so severe that they pose unique challenges for insurers and reinsurers. The unpredictability and sheer size of these types of events can result in substantial losses that deplete insurers’ and reinsurers’ capital. If a company believes that the risk of loss is unacceptably high given the rate that can be charged, it may decide not to offer coverage. If the private sector will not insure a particular type of risk, the public sector may create markets to ensure the availability of insurance. For example, several states have established Fair Access to Insurance Requirements (FAIR) plans, which pool resources from insurers doing business in the state to make property insurance available to property owners who cannot obtain coverage in the private insurance market, or cannot do so at an affordable rate. In addition, some states have established windstorm insurance pools that pool resources from private insurers to make insurance for wind risks available to property owners who cannot obtain it in the private insurance market. At the federal level, Congress established NFIP in 1968 to provide flood coverage to homeowners where voluntary markets do not readily exist. FEMA is responsible for the oversight and management of NFIP. Designed to help reduce the cost of federal assistance after floods, NFIP may be the sole source of insurance to some residents of flood-prone areas. Participating communities are required to adopt and enforce floodplain management regulations, thereby reducing the risks of flooding and the costs of repairing flood damage. Under the program, the federal government assumes the liability for covered losses and sets premium rates and coverage limitations. Like private insurance companies, federal and state government insurance programs also collect premiums, but their rates do not always reflect the risks that the programs assume, in part because they are designed to keep insurance affordable for most homeowners. Homeowners policies provide protections against a number of perils that can impact individuals and families. Policies, however, do not protect against all perils that homeowners could face. Various sections of a homeowners insurance policy outline perils covered and those the policy excludes. Policy provisions and other factors, such as location, can impact the coverage insurers offer homeowners. 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. According to many industry participants, the Insurance Services Office’s (ISO) HO-3 policy is the most commonly purchased homeowners policy and outlines the typical coverage and exclusions found in most homeowners policies. The HO-3 covers a person’s dwelling or home and other structures—such as detached garage, or shed—against all perils except those specifically excluded. This is commonly known as “open perils” coverage. For possessions, or personal property, the HO-3 covers only those perils listed in the policy, typically the 16 outlined below in table 2. Insurers refer to this kind of coverage as “named peril” coverage. Private insurers determine which perils are insurable risks on the basis of certain characteristics or criteria of the losses associated with them, including the following: Losses that are definite and measurable. The loss should be definite or determinate in time, place, and cause, and the insurer must be capable of setting a dollar value on the amount of the loss. Losses that are sudden, random, and accidental. The loss must result from chance and not be something that is certain to happen. If a future loss were sure to occur, coverage would have to be priced at the full value of the loss plus an additional amount for the expenses incurred. Losses that are not catastrophic. The losses should not affect a very large percentage of an insurance company’s policyholders at the same time in, for example, a limited geographic area. The losses should be independent of each other in order to spread and minimize risk. Additionally, the peril should not be so catastrophic that the insurer would be unable to charge a sufficient premium to cover the exposure. Losses for which the law of large numbers applies.