Home Insurance: Annual Premium Hikes

Home insurance premiums have been increasing annually, and there are several reasons for this. Firstly, inflation has played a significant role, with the cost of items in a home, such as appliances and equipment, increasing over time. This has been exacerbated by supply chain issues and the increased cost of building materials, including lumber, drywall, shingles and copper wiring. Another factor is the increase in severe weather events, such as hurricanes, floods, droughts and wildfires, which have become more frequent and destructive, leading to costly insurance claims. Additionally, construction costs have risen due to labour shortages and increased demand for repairs after severe weather events. Other factors include changes to a property, such as additions or improvements, which increase its value, as well as an individual's insurance score, which is similar to a credit score and is used to calculate the likelihood of filing a claim.

Inflation and construction costs

The cost of construction is also a significant factor in the increase in home insurance rates. When a home is impacted by severe weather, the cost of rebuilding or replacing it can be high. This is due to the increased cost of construction materials and labour. Inflation and supply chain issues have also contributed to the rising cost of building materials. For example, the cost of material goods for new residential construction rose by 14.3% between October 2021 and October 2022. Lumber and wood products increased by 6.2% during the same period, while asphalt roofing materials grew by 14.5%.

In addition, the construction industry is facing a skilled labour shortage, resulting in added expenses related to wages, supply chain problems, and other construction issues. This has led to increased costs for homeowners looking to rebuild or repair their homes after severe weather events.

Overall, inflation and construction costs are significant factors in the increase in home insurance rates, as the rising costs of materials and labour are passed on to the consumer.

Natural disasters

Standard homeowners insurance policies typically cover a range of potential disasters, including fire, lightning strikes, windstorms, hail, vandalism, and volcanic eruptions. However, it's important to note that common natural disasters like floods and earthquakes are often excluded from coverage. For example, flood insurance is usually purchased separately through the National Flood Insurance Program (NFIP) or private insurers. Similarly, earthquake coverage is often offered as a separate policy or endorsement.

The impact of natural disasters on insurance rates is influenced by the frequency and severity of such events. In 2022, the United States experienced 15 weather events with losses exceeding $1 billion each. The cost of insurance claims from these events is passed on to homeowners through increased premiums.

In addition to the direct impact of natural disasters, there are indirect factors that contribute to rising insurance rates. The increase in supply chain issues and construction costs due to inflation affect the cost of rebuilding homes, which is reflected in higher insurance premiums.

It's important for homeowners to understand their insurance coverage and be aware of any exclusions or additional endorsements needed to protect against natural disasters. While natural disasters can have a significant impact on insurance rates, insurance companies also consider other factors, such as property value, claims history, and credit score, when determining premiums.

Supply chain issues

The construction industry is facing a skilled labour shortage, further exacerbating the issue. The demand for labourers is particularly high in areas affected by severe weather events, such as hurricanes, wildfires, and tornadoes, as these events can damage multiple homes simultaneously. As a result, labour rates tend to escalate in the aftermath of such disasters.

The impact of supply chain issues on insurance claims has also been significant. For residential property claims, the increased cost and lack of availability of materials have led to longer repair times. This, in turn, results in insured individuals needing to spend more time in alternative accommodation while waiting for repairs to be completed.

Commercial properties are facing similar challenges, with businesses forced to remain out of action for extended periods. The increased costs of labour and materials have also resulted in higher insurance claims for commercial properties, particularly those affected by fire or water damage.

Motor claims are also affected by supply chain issues, with delays in parts availability and increased costs. This has resulted in vehicles being off the road for extended periods, especially if they are involved in accidents. The cost of replacement vehicles has also increased due to long waiting lists, with traditional waiting times of six to eight weeks now extending to up to a year.

Overall, supply chain issues have contributed to higher insurance rates and impacted the settlement of insurance claims, affecting both residential and commercial properties, as well as motor claims.

Credit score changes

Credit scores can affect home insurance offers and rates. Insurance companies use credit-based insurance scores to predict losses by determining which consumers are more likely to file claims. A credit-based insurance score is calculated differently for each insurer and is only one of many factors that determine your home insurance rates.

A credit-based insurance score is similar to a FICO credit score but is calculated by individual insurers to focus on the potential to make insurance claims. While a FICO credit score is calculated by credit bureaus to focus on the likelihood of paying back debt. Both scores are based on criteria like debt amount, whether credit card balances are paid off each month, and the length of credit history.

A higher credit-based insurance score may make qualifying for insurance easier and result in a lower rate. Insurance companies assume that if you have good financials and a good credit score, you are staying on top of your insurance payments and maintaining your property.

You can improve your credit-based insurance score by:

• Paying your bills on time
• Paying down loan balances
• Keeping credit card balances low or paying them off each month
• Thinking twice before opening new lines of credit
• Checking your credit report and resolving any errors or discrepancies

Property changes

Other property changes that can cause insurance rates to rise include the addition of a swimming pool, a trampoline, or a backyard play set. These are considered "attractive nuisances" by insurance companies, as they can attract children and increase the risk of injury. If someone is injured on your property, you could be held liable. However, if you take steps to prevent accidents, such as installing a fence around a pool, this may help to reduce the rate increase.

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