What’s driving increases in home insurance premiums?

Many homeowners end up frustrated when the cost of their homeowners insurance rises. The general perception is that homeowners insurers are increasing premiums without just cause or in an effort to scam homeowners. In reality though, homeowners insurance premiums depend on several factors beyond the control of homeowners and insurers. In this article, we review these variables in order to give homeowners peace of mind to know that insurers generally have a good reason for raising premium rates. We also explain why premium increases can be a positive thing for homeowners.

Natural disaster losses

Due to a variety of recent natural disaster events, property insurance losses continue to rise. As the amount of losses increases, pressure on insurance companies to raise premiums increases as well. In 2021, severe weather events included a deep winter freeze, floods, severe thunderstorms, heatwaves, hurricanes, and many others. According to a SwissRe report, these events led to annual insured losses from natural catastrophes estimated at $105 billion. This represents the fourth highest global loss amount since 1970. Martin Bertogg, the Head of Cat Perils at Swiss Re said the following. “In 2021, insured losses from natural disasters again exceeded the previous ten-year average, continuing the trend of an annual 5–6% rise in losses seen in recent decades. It seems to have become the norm that at least one secondary peril event such as severe flooding, winter storm, or wildfire, each year results in losses of more than USD 10 billion. At the same time, Hurricane Ida is a stark reminder of the threat and loss potential of peak perils. Just one such event hitting densely populated areas can strongly impact the annual losses.” Hurricane Ida and winter storm Udi caused almost $50 billion in insured losses alone. Homeowners insurance companies utilize the same reinsurers, which means that any above-average year in terms of insured global losses, will most certainly result in an increase in premium rates for homeowners. Without raising rates, insurance companies would not be sustainable. Reasonable premium increases allow insurers to pass along some of their increased costs in order to remain competitive in the years ahead.

Supply chain for construction industry

When an insured files a claim on their homeowners insurance policy, this is usually for mild to moderate home repairs. This could mean replacing a roof, windows, flooring, cabinets, or even a complete rebuild. As a result, the state of the construction industry supply chain has a direct influence on the premiums homeowners pay for insurance. As prices for construction materials and labor rise, so does the average cost per claim paid by insurers. The Covid-19 pandemic has adversely affected the construction industry. This impact occurred due to several factors, but most notably labor disruptions and increased materials demand related to both homeowners having more time at home as well as more disposable income from the economic stimulus. As a result, construction material inventories dropped and prices increased. This ultimately resulted in an increase in the cost of any home repair, which in turn increased the cost per claim for insurance companies. As a result, homeowners insurers must increase premiums in order to account for these costs and remain competitive. If insurers do not raise premiums, then they will not be sustainable for long, which ultimately will lead to less competition and even higher premiums for homeowners. The good news for homeowners is that as the construction supply chain moderates, so does its impact on insurers and premiums.

Climate change

Insurers base their premiums on risk. Quantifying this risk is difficult for insurers as the climate changes. The United States faced 20 weather disasters with economic losses of at least $1 billion each in 2021, per the National Oceanic and Atmospheric Administration (NOAA). This compares to an average of 7.4 annual billion-dollar disasters since 1980. The most likely factor in this increase is climate change. The below map details the location and intensity of each of these events. One observation from this map is the impact on highly urbanized areas. Wildfires, windstorms, and deep freeze events all occurred in developed and highly-populated areas susceptible to concentrated damage. As cities experience economic growth, they become more at risk to climate change. For example, as a city like Miami grows in population and developed structures, it has more to lose if it experiences a major hurricane. This is an important data point for insurers. They must consider the potential impact of climate change on future losses in order to accurately set future premiums. Otherwise, insurers will not remain competitive.

Ultimately, the above factors lead to an increase in homeowners insurance premiums in 2021 for most homeowners. In fact, according to the Insurance Information Institute, homeowners insurance premiums recently increased by an average of 4 percent up to an average annual premium of $1,398. Since 2017, premium rates are up 11.4% on average. This is important because these rates are increasing at a quicker pace than inflation. The bad news is that most experts believe that homeowners insurance rates will continue to rise. “From everything I know about homeowners’ risk, I expected those numbers to be higher,” said Dale Porfilio, the chief insurance officer at the Insurance Information Institute. “Honestly, I would say they still should go up further.” (source). While this may seem discouraging, homeowners should still have confidence in the homeowners insurance rates charged by insurers. Homeowners need to know that the homeowners insurance they buy, even at a higher rate, is one of their most important annual purchases. Any homeowner that experiences damage from a major disaster such as a fire or severe storm understands the value of homeowners insurance. If insurers do not prudently manage their business and capital, then they will not be able to sustain their business. Homeowners need to know that in the event of a claim, their insurer is capable of managing their claim and responding financially. Premium increases also allow insurers to remain adequately staffed in order to provide excellent claims service.

No one likes to see their mortgage payment increase because of a rise in home insurance premiums; however, policyholders can be confident insurers are not trying to scam them by increasing costs. Instead, insurance companies are trying to wisely manage their business in order to provide sound insurance products and services to homeowners for many years to come.