Why Homeowners Insurance Premiums Are “Soaring”

Homeowners insurance premiums are soaring. Insurers are declining more applications. And cover can be more restrictive.

If you’re a homeowner with a mainstream mortgage, this is undoubtedly straining your household budget when you least need it. That’s due to the mandatory nature of this insurance.

So, what’s going on? Can you do anything about it? And will it get better?

“Mandatory” homeowners insurance

While there isn’t a specific legal mandate requiring homeowners insurance, it’s almost certainly against the terms of your mortgage agreement not to have this coverage.

You’d be very lucky to find a mortgage lender that hasn’t made it a condition in your mortgage agreement. And it’s one that is enforced rigorously.

Indeed, you’ll have had to show proof of your coverage at your closing. And no coverage means no home purchase.

You can see why. The mortgage lender agreed to offer you a loan because you have a valuable asset that can be used as collateral in the case of a default. It can’t take a risk that the asset will slide off a cliff, burn to the ground, be submerged by a flood, or encounter any other disastrous event that drastically reduces its value. So, it insists you insure the asset.

How bad have things gotten?

An August 2023 report by digital insurance agency Matic highlighted just how challenging this market is for homeowners and insurers alike. It was based on some 30 million quote requests across 9 million properties through external insurance quoting engines.

Much higher premiums on homeowners insurance

Its main finding was that premiums for these policies have been rising sharply. And that means they’re now at “an unprecedented record high.”

In 2018, the average premium for homeowners insurance was $1,142. By the first half of 2023, that stood at $1,473.

As worryingly, since 2020, those premiums have been rising at a faster rate each year. So, they climbed by 5.03% between 2020 and 2021 and by 8.55% between 2022 and the first half of 2023. And that looks like the start of a trend.

Things are worse for those who unquestioningly accept a renewal from their existing insurer each year. Suppose you started a homeowners insurance policy in 2019. The average premium was $1,175. Since then, that policy would likely have climbed to $1,700 in 2023. That’s what the report calls “a staggering 43% increase since 2019.”

So, is the message to comparison shop at every renewal? That’s certainly a good idea but not the ultimate solution.

Way more applications are being declined

If your insurer hikes your premium too far, you’ll likely get quotes from its competitors. But that’s increasingly difficult.

Matic found insurers offering 35% fewer policy options to homeowners in 2023 compared to 2022. And that means insurers are turning down more requests for quotes.

Let’s put this in context. Homeowners applying to 10 insurers for quotes in 2022 would have received an average of 6.08 responses. But in 2023, they’d only get 2.87.

Why is homeowners insurance changing?

Matic CEO Ben Madick explains what he thinks is changing. “The increasing severity of natural disasters and the rising cost of construction is forcing mass-market carriers to reassess their growth strategies and put expansion on hold,” he says.

The Federal Emergency Management Agency (FEMA) declared 49 major disasters in the first eight months of 2023. Increases in wildfires, hurricanes, severe flooding, severe storms, and other disasters mean insurers are facing more claims from homeowners.

And higher construction costs make each claim more expensive to settle. The producer price index showed the price index for construction materials climbing to 331.786 in July 2023 from 233.300 in May 2020. That’s a 42% rise in 38 months.

But are there really more natural disasters now than in previous decades? Yes, according to the government’s National Centers for Environmental Information (NCEI).

It’s been tracking those of these disasters that cost (after adjusting for inflation) more than $1 billion. And it says: “The 1980–2022 annual average is 8.1 events (CPI-adjusted); the annual average for the most recent 5 years (2018–2022) is 18.0 events (CPI-adjusted).”

Might price pressure on premiums ease? Nothing’s impossible. But, as long as we’re seeing more natural disasters, it’s unlikely.

To regulate or not to regulate?

Where state insurance regulators energetically cap hikes in homeowners insurance premiums, many insurers choose to shutter their businesses in those states. That’s been happening in California.

But the opposite occurs with light-touch regulation. Insurers stay but premiums skyrocket. In Texas, for example, where the regulator approved the vast majority of insurers’ proposed changes, premiums surged, according to Matic. They were 15% higher in the first half of 2023 than a year earlier.

So, regulators are struggling to find the correct approach. But, ultimately, there may be little they can do to protect consumers when industry costs are climbing so sharply. Indeed, many insurers are already facing losses.

Do you have enough homeowners insurance coverage?

Lawyer Omar Ochoawho, who specializes in insurance claims, says most people assume they’re fully covered when they aren’t. That’s according to ABC10 News in California in August 2023.

Mr. Ochoawho told the station that people "not understanding coverage is a big thing that I see.”

In particular, you need to know that your coverage is sufficient to rebuild the home and replace its content in a worst-case situation.

And that’s unlikely if you have an “actual cost value policy.” One of those will base its payouts on the remaining value of an asset.

ABC10 gives an example. Suppose your 20-year-old roof would cost $30,000 to replace and has a life expectancy of 30 years. With actual cost value, the insurer would pay you only $10,000 toward replacing it. That’s because you’ve already had $20,000 of its lifetime value over the last 20 years.

You can see the thinking behind that. But many homeowners don’t have sufficient funds in their bank accounts to cover such contributions. If you’re one of them, make sure you have a “replacement cost value” policy, which pays out 100% of replacement costs. But be aware the premiums on those policies may well be higher.

Other tips

Mr. Ochoawho has a couple of other insurance tips for homeowners:

1. Make an inventory of all your belongings — In other words, list or catalog your home’s contents and characteristics (including the age of the roof). Print it out or back it up and keep a copy off-site, in the cloud or somewhere else safe
2. When you suffer a loss, document the damage you’ve endured with photos or videos. And don’t throw your damaged stuff away before your insurer’s loss adjuster has visited and inspected them

That’s sound advice that could maximize your payout when you make a claim.

One other thought. If you’re struggling with your premiums, you may be able to reduce them by upping your deductibles. It’s fine to do this, especially in low-risk areas. However, first, make sure you’ll be able to afford your contribution when bad things happen.

Check your homeowners association policy

If you live in a condo with a homeowners association (HOA), you’re probably dimly aware that it has an insurance policy. But take time to read it.

That’s because such policies vary widely in their coverage. Although “all-in” sounds great, it won’t cover your personal belongings. Instead, it will restore your condo to its original condition, including appliances, before you moved in.

Other HOA policies cover little more than common areas and amenities. Even “bare walls” policies, which are nearly as good as all-in ones, only restore your condo to ... well, bare walls.

So, you’re very likely to need to insure your personal belongings. And you may well have to get extra coverage for further restoration. Start by reading your HOA’s insurance documents so you know where you stand.

Homeowners insurance and disasters

Your standard insurance will not provide coverage for flooding and earthquakes. So, you’ll probably need a second, specialist policy to protect you from flooding and possibly earthquakes.

Your need will be particularly great if you live in an area prone to such events. But the Insurance Information Institute (III) suggests you get flooding coverage even if your risk is relatively low.

Ninety percent of all natural disasters in America involve flooding. So, few are at zero risk.

Federal and state governments try to keep these specialist policies affordable. And most flood insurance is provided by insurers contracted to FEMA. Meanwhile, Californians can get earthquake coverage through the California Earthquake Authority (CEA).

The bottom line

It’s inevitable that homeowners with mortgages will need homeowners insurance. And it’s likely for them to continue to face higher premiums and fewer choices. Indeed, some insurance companies are already encountering heavy losses on these policies.

That’s because we’re seeing more natural disasters each year, generating more claims. And sharply rising construction costs make each claim more expensive.

When you shop around for lower premiums, make sure that a cheaper policy doesn’t mean less coverage. In particular, don’t swap from a “replacement cost value” policy to an “actual cost value policy” unless you absolutely have to. That’s because the latter could see you having to contribute hugely more to any claim.

If you have the wrong coverage, you may have a financial disaster waiting to happen. So, dig out your insurance documents now and get yourself the protections you need.