Jeffrey Wade
Homeowners across the U.S. are facing a sharp increase in insurance costs, with premiums rising 21% from 2021 to 2023, according to a new analysis from First American. This surge has been driven by a combination of rising natural disaster risk, soaring construction costs, and higher claim payouts, reshaping the home insurance landscape nationwide. The U.S. Department of the Treasury's Federal Insurance Office (FIO) released a report in January 2025, highlighting that homeowners insurance is becoming more expensive and less accessible due to escalating climate-related events. The report analyzed data from over 246 million policies and found that average premiums increased faster than inflation. Homeowners insurance rates are expected to continue rising, with Nationwide customers also experiencing rate increases due to rising costs and severe weather.
| Characteristics | Values |
|---|---|
| Reason for increase | Climate disasters, rising construction costs, reinsurance challenges, and rising natural disaster risk |
| Average increase | 21% from 2021 to 2023, translating to $300 more per year per policy on average |
| Average annual cost | $2,110 per year |
| Average cost of Nationwide home insurance | $2,610 per year |
| Average homeowners insurance premium increase | 8.7% faster than the rate of inflation from 2018 to 2022 |
| Average premium increase for homeowners in high-risk areas | 82% more than those in the lowest-risk areas |
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Climate change
Firstly, insured losses and insurance claims from climate-related disasters are increasing. This is a result of the increasing frequency and intensity of natural disasters, as well as the significant increases in building and development in high-risk areas. Wind and hail, water damage and freezing, and fire and lightning have long been leading causes of property damage, and the recent increases in wildfire losses in Western states have also contributed to rising insurance premiums.
Secondly, catastrophic weather events are becoming more frequent and more damaging due to climate change. Insurers must increase their capital reserves and/or purchase more reinsurance to be able to pay out claims in these worst-case scenarios, which drives up costs. The rarity of these events means that there is limited historical data to support traditional actuarial analysis, and insurers may be underestimating climate risk exposure. The adoption of more sophisticated risk modeling will likely lead to higher premiums for high-risk homeowners.
The impact of climate change on insurance markets is not limited to a specific region or state. While states like Florida, California, and Louisiana have traditionally been the most affected, the problem is spreading to other states like Iowa, Arkansas, Ohio, Utah, and Washington. Nationally, insurers have paid out more in claims than they have received in premiums over the last decade, and those losses are increasing.
The rising costs of construction materials and skilled labor, as well as increasing interest rates, have also contributed to the increase in insurance premiums. Inflation is also a significant factor, as insurers may raise premiums to offset the rising costs of claims.
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Inflation
From 2018 to 2022, average homeowners' insurance premiums per policy increased by 8.7% faster than the rate of inflation, according to data analyzed by the U.S. Department of the Treasury. This has been driven by a combination of factors, including rising natural disaster risk, soaring construction costs, and higher claim payouts. The annual number of billion-dollar disaster events has tripled, leading to increased financial losses for insurance companies.
The impact of inflation on homeowners' insurance is particularly evident in communities affected by substantial weather events. From 2018 to 2022, consumers living in the 20% of ZIP codes with the highest expected annual losses to buildings from climate-related perils paid $2,321 in premiums on average, 82% more than those in the 20% lowest-risk ZIP codes. This disparity in costs underscores the influence of inflationary pressures and the increased costs of climate-related events on homeowners' insurance premiums.
While inflation has contributed to the rising cost of homeowners' insurance, it is important to note that other factors are also at play. The increasing frequency and severity of climate events have made insurance more costly and harder to procure for millions of Americans. Insurance companies are becoming more selective about the homes they insure, leading to higher policy non-renewal rates in high-risk regions. Additionally, factors such as individual claims history and the level of coverage purchased can also impact insurance rates.
Overall, inflation has played a significant role in the increase in homeowners' insurance rates, particularly in areas affected by natural disasters and climate-related events. As inflation drives up replacement and construction costs, insurance companies adjust their premiums to mitigate the financial risks associated with higher claim payouts.
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Natural disasters
The impact of natural disasters on insurance costs is evident in the data. According to the National Oceanic and Atmospheric Administration (NOAA), the annual number of billion-dollar disaster events has tripled, leading to a surge in insurance costs. The annual cost of these disasters has risen from $55 billion to $151 billion. As a result, insurance companies have had to pay out more in claims, which has contributed to the rise in premiums.
Homeowners in communities affected by substantial weather events and climate-related perils are paying significantly more for their insurance. Those in the top 20% of ZIP codes with the highest risk of climate-related dangers pay 82% more in premiums than those in the lowest-risk areas. This disparity highlights the financial burden faced by those in vulnerable regions.
The rising cost of natural disasters has also been driven by factors such as increasing construction costs and reinsurance challenges. As a result, insurance companies have had to adjust their rates to compensate for the increased financial strain, passing some of the costs on to their customers.
The impact of natural disasters on insurance costs is expected to continue, especially in regions vulnerable to climate change impacts. With the frequency and severity of climate events on the rise, the financial stability associated with homeownership is being threatened. Homeowners are facing challenging decisions as they navigate the increasing costs of insurance and the need to protect their properties from potential disasters.
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Supply chain issues
The supply chain bottleneck also contributed to the scarcity and higher prices of appliances, refrigerators, and stoves. The NAHB reported shortages of materials, with appliances being the most in-demand items, followed by lumber. The pandemic's economic impact, along with the uncertainty in global supply chains due to conflicts and piracy, affected the movement of commodities and raw materials, further driving up costs.
The increased demand for building supplies and labour after severe weather events and natural disasters also played a role in the rising insurance costs. Climate change and extreme weather events, such as hurricanes, floods, wildfires, and heatwaves, have led to more frequent and severe disasters. The combination of supply chain issues and the rising frequency and severity of weather events has resulted in higher insurance costs for both consumers and insurers.
Moreover, supply chain issues can delay repairs and result in more expensive losses for businesses. To avoid being underinsured, businesses need to ensure they have adequate replacement cost coverage and up-to-date replacement cost estimates. Supply chain disruptions and inflation have also contributed to the rising cost of vehicle repairs, with vehicle parts and labour costs increasing significantly in recent years.
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Insurance company costs
The cost of insurance for insurance companies is influenced by several factors, including the amount of coverage selected, the policy limit, the deductible, the claims history, and the level of risk associated with the insured entity. Ultimately, insurance companies aim to balance the premiums they receive with the potential payouts for claims and expenses.
The amount of coverage selected directly impacts the premium, with higher coverage limits typically resulting in higher premiums. For example, a $1 million/$2 million policy is likely to be more expensive than a $1 million/$1 million policy. The aggregate limit, which is the maximum amount an insurance company will pay towards a claim during a policy term, also affects the cost.
The level of risk assumed by the insurance company is a significant factor in determining costs. This includes assessing the likelihood of claims being made and the potential cost of those claims. For instance, businesses in high-risk industries, such as those with hazardous machinery or a greater risk of malpractice lawsuits, will generally face higher premiums. Similarly, businesses operating in areas with higher population densities or higher frequencies of natural disasters may experience increased insurance costs due to the elevated risk of claims.
The claims history of the insured entity also plays a role in determining insurance costs. A business with a clean claims history can demonstrate safety and experience, potentially resulting in lower insurance rates. Conversely, a history of claims indicates a higher risk and will drive up insurance rates.
Additionally, insurance companies consider the type of business, its location, and its financial stability when setting premiums. Businesses in certain industries, such as healthcare or finance, may require specialized forms of insurance, such as cyber insurance, which can increase costs. The location of a business can impact costs due to variations in the cost of living, property values, and environmental risks. Moreover, the financial stability and longevity of a business can influence its insurance rates, as stability and experience may suggest lower risk.
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Frequently asked questions
There are several factors contributing to the rise in homeowners insurance premiums. Firstly, the lingering effects of the Covid-19 pandemic, including inflation, labor shortages, and supply chain disruptions, have driven up the costs of materials and car parts, leading to higher insurance claims and premiums. Secondly, the increasing occurrence of natural disasters due to climate change has resulted in more frequent and severe climate-related events, causing significant financial losses for insurance companies, who are passing on these costs to policyholders. Lastly, legal claim funding, where hedge funds provide money to plaintiffs in exchange for a percentage of the settlement, has also contributed to the rise in premiums as insurance companies adjust their policies to stay profitable.
Yes, in addition to the factors mentioned above, Nationwide, like other insurance companies, may also consider your credit history and insurance score when calculating your monthly premium. Maintaining a strong track record of on-time payments and paying the full balance can help improve your insurance score and potentially lower your premium.
There are a few strategies you can consider to lower your Nationwide homeowners insurance premium. Firstly, review your policy regularly to ensure you are not overinsured or underinsured. Secondly, look for bundling discounts offered by insurers for combining home and auto policies. Additionally, some insurers provide discounts for implementing risk-minimizing technology, such as smart home devices, or for routine maintenance and updates to your home's systems, as newer systems have a lower chance of loss.
