The Dynamic Nature Of Hazard Insurance: Unraveling Annual Adjustments

Hazard insurance is a subsection of a homeowners insurance policy that protects the main dwelling and other nearby structures, such as a garage. It is coverage that protects a property owner against damage caused by fires, severe storms, hail/sleet, or other natural events. While hazard insurance is typically written for one year and is renewable, it does not necessarily change every year. However, there are several factors that can cause your insurance rates to change annually. These include inflation, an increase in the value of your property, filing claims, property changes, and construction costs in your area. Additionally, factors such as your location, credit score, and claims history can also impact your insurance rates.

Inflation and climate change

Insurers are facing higher risks due to more frequent and severe weather events caused by climate change. As a result, reinsurance companies, which provide protection to insurance companies against catastrophic losses, are charging higher prices for their services. These increased costs are passed on to consumers, leading to surging insurance costs across various types of insurance, including home and car insurance.

The impact of climate change on insurance is evident in the increasing number of billion-dollar disasters. In 2023, the United States experienced 25 climate and weather disasters, each costing at least $1 billion. Climate change is also causing shifts in weather patterns, leading to areas once considered low risk to be viewed as high risk, resulting in steep premium hikes for homeowners.

Inflation plays a significant role in rising insurance costs as well. As the cost of items in a home increases due to inflation, insurance companies adjust their rates accordingly. Additionally, construction costs have risen due to higher material and labor expenses, which are factored into the replacement cost formula that determines insurance premiums.

The combination of inflation and climate change has led to a challenging situation for both consumers and insurance companies. Consumers are facing higher insurance costs, while insurance companies are dealing with increased risks and claims. As a result, insurance companies are re-evaluating their business models and adapting to the changing environment.

Natural disasters

The main natural disasters that impact the cost of homeowners insurance are tropical cyclones, wildfires, tornadoes, flooding, earthquakes, and severe storms. Standard homeowners insurance policies typically exclude damage resulting from earthquakes, floods, mudflows, landslides, and tsunamis. However, depending on your location, your insurance policy may cover damage caused by wind or hail, fire, lightning, the weight of ice, snow or sleet, and volcanic eruptions.

If you live in an area prone to flooding, you can purchase flood insurance through the National Flood Insurance Program (NFIP). Similarly, if you live in an area prone to earthquakes, you can usually add an endorsement to your policy for an additional cost, or purchase separate earthquake insurance. Separate policies or endorsements are also available for wildfire coverage and windstorm insurance.

It's important to review your homeowners insurance policy to understand what is and isn't covered in the event of a natural disaster. While your policy may cover damage to your dwelling and personal property, there may be exclusions or limitations, especially if you live in a high-risk area. Consulting an insurance agent or broker can help you navigate the complexities of your policy and determine if you need additional coverage.

Construction costs

The cost of construction varies depending on the location, with some areas having higher construction costs than others. The replacement cost of a home is based on the estimated cost of materials and labour needed to rebuild the house, which can be higher in certain regions. Inflation also plays a role, as the cost of items in a home will be higher than the previous year, leading to higher insurance rates.

In addition to the cost of materials and labour, the demand for construction labour also affects insurance rates. A skilled labour shortage in the construction industry has resulted in added expenses related to wages and supply chain problems, further driving up the cost of home repairs.

When purchasing hazard insurance, it is important to consider the location of the property and the potential risks associated with the area. Properties located in areas with a history of losses, such as vandalism, theft, or weather-related events, may have higher insurance rates. On the other hand, being located near a fire station can lower insurance premiums.

When insuring a new construction home, it is important to note that standard home insurance policies may not cover the risks associated with building a home. A separate policy, such as builder's risk insurance, may be necessary to cover the added risks of building a home, such as theft of construction materials and liability for a vacant home. The cost of new home construction insurance varies depending on factors such as the size and building materials used, as well as the length of the construction project.

Credit score

In contrast, those with poor credit scores are viewed as more likely to depend on insurance payouts in the event of a claim. Consequently, they may be subject to higher insurance rates. While credit scores are not the sole factor in determining insurance rates, they can be a significant contributing factor.

It is worth noting that some states, such as California, Hawaii, and Massachusetts, have strict regulations or outright bans on the use of credit scores in setting insurance rates. In these states, other factors, such as driving history or the number of miles driven, play a more significant role in determining insurance premiums.

To improve their credit scores, individuals can take several steps, including paying their bills on time, reducing credit card debt, and maintaining a low credit utilization rate. By improving their credit scores, individuals may not only secure lower insurance rates but also gain access to better loan and credit card rates and potentially save money through refinancing.

Claims history

A claims history full of claims is not desirable to an insurance underwriter. Statistically, a history of previous claims correlates with a greater likelihood of future claims, which means higher premiums. In particularly severe cases, they might not be able to offer insurance at all.

On the other hand, a claims-free history is exactly what underwriters want to see. If you're claims-free, it tells the underwriter that you're capable of preventing avoidable losses. If your insurance history is from the same property, it shows that your home is in good shape and that you're maintaining it well. Most insurers offer a discount for claims-free histories.

In the context of hazard insurance, claims history is one of many factors that affect the cost of home insurance. Insurance companies often take previous claims filed within a certain time frame into consideration when calculating rates. When a homeowner files a claim, their insurance company generally assumes they are more likely to file future claims. Having a history of insurance claims, even small ones, might indicate an even greater future claims risk for the insurance company.

Insurers may assess your personal claims history at current and prior properties. Even if you're insuring a new home, your prior claims history from other homes will be visible to insurance companies for five to seven years on your Comprehensive Loss Underwriting Exchange (CLUE) report and will likely affect your premium on your new house. The CLUE database also includes claims filed that may have been denied by your insurer.

It's worth noting that the impact of claims history on insurance rates can vary depending on the nature and cost of the claim, the time since the claim was made, and other factors.

Frequently asked questions