According to III (the Insurance Information Institute), the National average cost of home insurance increased to a record high of $1,398 last year. This, of course, placed an added burden on homeowners who were already struggling with inflation. Below we analyze the reasons for the situation and explain what a homeowner can do about it.
Why Are Home Insurance Premiums Increasing So Fast?
To understand why home insurance premiums are rising faster than before, one has to know how insurance companies calculate the cost of insurance.
The majority of homes are insured for replacement value, i.e., how much it will cost the insurer to replace your home if it is completely destroyed. This amount depends to a large extent on the cost of labor and materials that go into constructing a home. Therefore, if there is a sharp increase in, e.g., the price of lumber or wages go up significantly, it will cost much more to repair or replace your home, and insurance companies will have to increase their premiums.
This is exactly what happened over the last couple of years. When COVID-19 hit the United States, lumber producers were afraid that the Great Recession would repeat itself. So they unloaded inventory and slashed production. But instead of dropping, demand went up dramatically. This mix of reduced supply and increased demand caused lumber prices to spike by 400% in a single year. The situation has worsened by the decision to increase the tariff on Canadian lumber from 9% to 18%.
Unusually severe natural disasters also affect the cost of home insurance. A home insurer is a business like any other, and if its actual expenses far exceed the projected amount, it could easily cause huge losses for insurance companies. The only way to recover those losses is by passing them on to policyholders and increasing insurance premiums. Last year’s hurricane season, for example, caused record losses in coastal states such as Florida and Louisiana. And the Colorado wildfires and the Texas freeze also caused massive losses for home insurers. All of these pushed up the cost of home insurance even further. While many national insurance carriers were affected by these disasters, most regional and local insurance companies that we represent, fortunately, were not.
Do you Have Enough Coverage?
Because of the increased cost to replace or repair your home, it may be an excellent time to review the amount of coverage you have on your home. It could be that the increased cost of replacing or repairing your home now exceeds the amount of coverage you have in place.
There is also the consideration that if you were displaced due to a loss, the time it will take to repair or replace your home will exceed the amount of coverage you have to pay for a hotel or house rental while your home Is being rebuilt or repaired.
How Can Homeowners Keep the Cost of Home Insurance Low?
Fortunately, there are quite a few things that homeowners can do to keep their home insurance premiums in check.
Ask us to look for a more competitive rate. We represent many of the top insurance firms. If your home insurance premiums are going up too fast, we can review your policy to determine what factors may be causing the increase. We may also be able to recommend alternatives, that can better protect your home for a lower premium.
Increase your deductible. The deductible refers to the amount the homeowner has to pay when they submit a claim. Increasing this amount may help reduce your insurance premium.
Updates to home or added Security features. You should be able to reduce your homeowners insurance cost by installing a Central-Reporting security system. Insurance companies have added discounts for these to help minimize the possibility of a loss occuring or minimize the damage if one does. Also, updating your home’s roof, plumbing, heating, and electrical systems can also cut the risk of fire and water damage. Some insurance companies will offer credits for these updates to your home!
Final Thoughts on Home Insurance
Home insurance is a more complex topic than many people realize. The typical home insurance contract is filled with technical terms, and it’s easy to misunderstand some of the clauses. Making use of an independent insurance agent like us will help you to avoid many of the potential pitfalls and to get the best possible home insurance premiums. Feel free to contact us if you have any questions.