Home insurance costs are on the rise, and there doesn’t appear to be an end in sight. Over the last decade, premiums have increased at an average annual rate of about 8%, much higher than the average annual rate of inflation. What’s been driving the increase? Put simply, property insurance companies have been struggling with elevated costs and have been passing them on. Even with insurance rates rising as much as they have, insurers have been struggling to turn a profit on property insurance. Property insurers are still facing cumulative losses on underwriting dating back to 2016. In 5 of the 8 years from 2016 through 2023, insurers faced underwriting losses. These combined losses are well in excess of their combined underwriting gains in the other 3 years in that period, according to the National Association of Insurance Commissioners. The short answer to “Why are my premiums so much higher?” is that insurers are bleeding money. When it comes to the underlying causes of these cost increases, there are three primary culprits: where homes are being built, commodity inflation, and the increasing frequency and severity of natural disasters.
It should come as no surprise that it costs more to insure a home in an area prone to natural disasters. Unfortunately for insurers, that just so happens to be exactly where homes are being built. States such as Texas (tornadoes), Florida (hurricanes), and Colorado (wildfires) are among the most expensive states to insure homes in, all coming in within the top 10 states with the most expensive premiums. These states are also among the top 15 in terms of numeric population growth since 2021.
Another not-so-surprising reality of property insurance is that as the cost of repair increases, so does the cost of insuring a home. Some of the most common raw materials needed to repair, remodel, and build homes, such as lumber, have become more expensive over time. Beyond just raw materials, reinsurance, which is an insurance policy that insurance companies take out, has also become more expensive, with the average property reinsurance policy increasing in price by 15% in 2022 and 35% in 2023. As reinsurance premiums paid by insurance companies rise, premiums to end clients are raised to offset these costs.
Climate change has driven insurance costs higher by making natural disasters more frequent and more powerful over time. Per the Minneapolis Federal Reserve, in the 1980s, there was an average of 1.8 billion dollar disasters per year, adjusted for inflation. In the 10-year period ending in 2023, that number had increased to 14.4 billion dollar disasters. While all types of peril (i.e., hurricanes, tornados, wildfires, windstorms, etc.) have seen increases in the frequency of occurrence, hail, which has been linked to increased average temperatures, has been the biggest culprit. To try and mitigate the impacts of higher frequency and higher intensity events, some insurers have begun reducing their footprint in states more prone to disasters, which reduces competition and in turn, further increases premiums.
