Homeowners Insurance: Rising Costs, Reduced Coverage
Homeowners across the nation are seeing their insurance bills climb, and the protection they receive is shrinking. This article examines the factors driving these changes, the impact on homeowners, and what solutions might be available.
One insurance agent shared a story highlighting the issue: a client of 20 years switched agencies due to a $2,000 increase in their home insurance premium.
Soaring Premiums
Across the U.S., the cost of homeowners insurance has grown. S&P Global data indicates that average premiums increased by 34% nationwide over a seven-year period. Some states in the Ninth District, including South Dakota, experienced even sharper increases, reaching 41% over the same period. During this time, inflation grew by 24%.
Coverage Reductions
As premiums rise, the coverage homeowners receive is diminishing. Insurance companies are adjusting policies, placing new conditions on coverage for common issues like wind and hail damage. This ‘shrinkflation’ in insurance means that homeowners are paying more for less.
What’s Driving the Changes?
Experts point to several reasons for the surge in premiums:
- Catastrophes: Extreme weather events like hurricanes, wildfires, and severe storms are significant financial burdens on insurers.
- Increased Construction Costs: Inflation in building materials and labor makes repairing damaged properties more expensive.
These factors collectively stress the insurance industry, which then affects homeowners’ affordability and access.
Where Are Premiums Rising Fastest?
States most vulnerable to natural disasters are experiencing the most dramatic premium increases. In the Ninth District, this includes South Dakota, Minnesota, and Montana. These areas are especially prone to tornadoes, hail, and wildfires.
How Premiums are Calculated
Although specific pricing models vary by insurer, companies aim to balance competitiveness and solvency. Regulators like those in Minnesota review premium increase requests to ensure fairness.
- Underwriting Losses: A key measure of industry health is the comparison of premiums earned against expenses, particularly payouts for damages. Data shows the U.S. insurance industry took losses in four out of five years from 2018 to 2022.
The Impact of Catastrophes
The increase in severe storms has significantly impacted the industry. Nearly half of the ‘billion-dollar’ storms in 2023 hit Ninth District states. Between 2014 and 2023, such storms caused over $246 billion in property damage.
Climate Change and Other Factors
Several elements contribute to the rising number of catastrophes. Climate change likely makes hurricanes more intense and extends wildfire seasons. More homes built in areas with a high risk of natural disasters also contributes to increased damages.
Insurance Adjustments and Reinsurance
Insurance companies take measures to lessen their risks, such as buying reinsurance, which protects them from major losses. The cost of reinsurance has also surged due to global catastrophes. To manage costs, insurers are increasingly scrutinizing potential risks and adjusting coverage details.
What Homeowners Can Do
In response to higher premiums, some homeowners are choosing less expensive coverage, essentially taking on more of the risk themselves. Some might even forgo insurance altogether, which is a growing worry.
It’s important to research and compare insurance options to find the best fit.
Future Outlook
While premium increases might be slowing down, rates are still going up faster than inflation and wages. Industry analysts expect rates to continue rising. State insurance regulators are working to keep the market healthy with programs that help homeowners fortify their homes, which can lead to premium discounts.
Author
Tu-Uyen Tran is the senior writer in the Minneapolis Fed’s Public Affairs department.
