Homeowners’ insurance premiums are growing rapidly

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Ken Hoagland was surprised to see an increase in his monthly mortgage payments recently.

“I noticed that our mortgage went up by $ 100 with a $ 1,250 mortgage,” he said. “So, I looked at it. First I called the mortgage company and they said, “Insuring your house costs a lot more. Speaking with [the insurance company]. ‘ Then I called the USAA and said, “What’s going on?”

Across the country, homeowners renewing their policies are finding that rising material costs, supply chain disruptions and climate change are combining to increase premiums by an average of 4 percent to an average annual premium of $ 1,398, according to the Institute. for insurance information, non-profit organization. known as Triple-I, which provides information about the insurance industry. Triple-I uses data from Standard & Poor’s Global Market Intelligence for its analysis.

Premium rates have risen by an average of 11.4 percent since 2017, meaning they are rising faster than inflation – and insurance experts expect rates to remain high.

“From everything I know about homeowners’ risk, I expected those numbers to be higher,” said Dale Porfilio, chief insurance officer at Triple-I. “Honestly, I’d say they still need to rise higher.”

Most mortgage lenders require borrowers to carry an insurance policy to homeowners. According to a recent analysis by Bankrate.com, the average homeowner spends about 1.91% of their household income on home insurance.

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The cost of home insurance depends on several factors. Location often increases costs, especially if the house is in an area prone to natural disasters. Some areas have higher prices because rebuilding a house there costs more. How resilient a house is to natural disasters – for example, if it is built to withstand an earthquake – can affect percentages.

When Hoagland spoke to his insurance agent, he learned that increases in his insurance premiums were linked to rising timber prices, severe skills shortages and inflation. All these factors led to an increase in the cost of replacing his house. The insurance company estimated the cost of restoring his Tuscan-style house in 1871 in Berkeley Springs, Virginia, which he bought for $ 265,000 less than two years ago, at $ 625,000.

“My first instinct was that it was some kind of insurance fraud,” Hoagland said. I called all the top-rated insurance companies, five or six of them, and said, “I’m not sure I want to insure replacement value.” Each of them said, “No, this is the only insurance that we provide. “

Most homeowners want their home to be returned to the condition it was in before the event destroyed it, so the cost of replacing it – the cost of rebuilding the home as it was – often differs from the value of the home. Replacement costs also do not take into account the value of the land or current building codes. In some cases, the cost of replacing a house is less than the value of the house, as the value of the land is high in this area. Homeowners have to rebuild their property under the new codes, which can cost more.

“We offer what is called replacement costs,” said Karen Collins, assistant vice president of personal services at the American Property and Accident Insurance Association, the largest commercial insurance association. “We want to restore, to replace what you had before. We are trying to assess this with an inflation factor. But when you have such an unusual rate of inflation, these automated processes may not always be up to date. “

Rising costs for raw materials, especially timber, and supply chain disruptions add to the end result. When the pandemic struck, timber producers feared a repeat of the Great Recession. They cut production and unloaded inventory. But demand grew, surprising them. The price of timber jumped to $ 1,500 per thousand feet of board in March, a 400 percent increase over the previous year. The Biden administration’s decision in November to double tariffs on Canadian timber to 18 percent from 9 percent during the Trump administration also affected prices. Canada is the largest timber trading partner of the United States, providing about 30 percent of US supplies.

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“Currently, timber prices are about $ 900 per thousand feet per board,” said Robert Dietz, chief economist at the National Association of Home Builders. “Domestic timber production has not really increased in the United States. The economy of timber tariffs makes no sense when we are trying to fight inflation. “

The bottleneck in the supply chain has also made refrigerators and stoves more expensive and scarce. A NAHB survey of its members in May found a shortage of material more widespread than ever since the NAHB began tracking the issue in the 1990s. The appliances were rated as the most accessible items, followed by wood.

“It takes more time to build and costs more,” Dietz said. “Using [Producer Price Index] data on inflation, we are building a basket of goods that are related to housing and currently these prices have risen by about 19 percent on an annual basis. “

Climate change is also contributing to higher levels. The year began with a devastating winter frost in Texas, which led to the largest event in the state without hurricanes. Hurricane Ida, which struck late last summer, is expected to be among the five most expensive hurricanes in US history. It is too early to estimate the losses from the tornado, which hit eight states in early December.

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Porfilio said that insured damages from tornadoes, hurricanes, severe storms, forest fires and other natural disasters have reached $ 82 billion this year, with a total of more than $ 400 billion since 2017.

“Climate risk continues to put pressure on all things weather-related,” Porfilio said. “We are seeing heavier hurricanes, heavier forest fires, and the science is not so clear about tornado events as to whether or not they change in frequency. But what we definitely know is that the burden is growing. “

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When a natural disaster affects a large area, the demand for materials and labor puts pressure on prices.

“What usually happens when you have an event that destroys or seriously damages hundreds of thousands in the subway area is that building material prices in these markets tend to rise by about six, sometimes up to nine months.” said Ditz. “You get an increased shortage of labor in the market and neighboring markets because a lot of labor and construction know-how goes to the remodeling sector for repairs.”

Due to the onset of natural disasters, some insurance companies offer extended coverage for replacement costs for an additional fee.

“After a natural disaster, a widespread incident, [there is] “the demand jumps … when you have costs that jump because demand jumps right after that,” Collins said. “So, the normal price for reconstruction, replacement suddenly changes. The optional optional replacement cost approval gives you an extra cushion for this surge in demand. ”

Home insurance costs are rising faster in some states than in others. According to Triple-I, Colorado has a 21% increase in average annual homeowners’ insurance premiums from 2017 to 2020. Rates in Texas rose 18% during that time period, and in California – by 9.6 %. DC saw an increase of 3.2 percent; Maryland increased by 13.4% and Virginia – by 14.8%. West Virginia, where Hoagland has his home, rose 3.1 percent.

Although insurance companies are filing interest rate increases to deal with rising costs, they are being kept under some control by government regulators. California is an example of this. Although the country is devastated by forest fires, homeowners’ insurance premiums are not keeping pace with increasingly expensive claims.

“There are some limits to how quickly insurers can adjust their interest rates,” Collins said. “You may have a little [states] who have not had the same tariff increase simply because carriers are still in the process of negotiating a submission that is being withdrawn for a long time.

Whether the increases are small or large, there are ways to save money on homeowners’ insurance premiums. Hoagland chose to increase its stake from $ 1,000 to $ 2,000, which reduced its owners’ insurance by about $ 500 a year.

Eight tips for buying homeowners insurance

On its website, Triple-I lists 12 ways homeowners can reduce the cost of their premiums, including shopping around, packing home and car insurance, making your home more resilient to disaster and improving home security.

Although 2021 may be an exceptional year for natural disasters and rising inflation, it may be some time before homeowners’ insurance premiums fall.

“I think [homeowners insurance premiums] they need to rise faster than in the future due to climate risk as well as inflationary pressures on repair costs, ”Porfilio said. “The reality is that we should all expect them to rise because costs are generally rising and all our insurance policies reflect costs. So it’s a matter of relative size. I believe, and we have enough data to show that percentages need to rise more than they were. I think there is little to catch up. “

clarification

The paragraph on replacement costs had to mention that the houses had to be rebuilt according to the current building codes, which could cost more.

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