Insurance Premiums Are Rising Faster Than Inflation
Updated: Feb 15
Supply chain issues, prices of materials, and climate change are all driving costs up.
House fire near Woodley Park, Washington DC. Photo from Twitter @dcfireems
When Leslie Hastings got her mortgage statement in January 2022, she noticed that her monthly payment went up by almost $50 per month. She called her mortgage company. They told her the increase was because her homeowner's insurance went up. She reviewed her USAA policy and noticed her annual premium increased by nearly $600. She called USAA and was told by a rep that she didn't have enough coverage to replace her home. So the insurance company increased her dwelling limit. She was furious. "I asked if they could lower my limit, but they refused. I was told that my home has to be insured to the full replacement cost and that number went way up this year."
Ms. Hastings asked her neighborhood listserv for recommendations for insurance agents. She reached out to one of the agents, Michael Heer of CB Chambers Insurance (author of this article). "I reviewed her policy and provided a few comparable quotes. We were able to switch Ms. Hastings to Travelers. Although we couldn't get her a Homeowner's rate as low as before, we were able to beat USAA's new rate by about $100. When we bundled her Homeowners with Auto and Umbrella, we saved her about $400 in total," said Mr. Heer.
"A similar situation is playing out with many of our clients. I'm seeing home and auto policies renewing with increases around 10% - with greater increases on the home policies. Clients are shopping around. But most aren't finding better deals because every company is raising rates. Our main carriers include Travelers, Nationwide, Allstate, Progressive, and Chubb. I've been busy looking for better rates for my existing clients. Sometimes clients will request new quotes after an increase. Other times I will proactively shop new rates for my clients. It's very time-consuming to do this. But as an agent, I want to keep providing value to our customers. If I can find them a better deal, we will retain that client and they will refer friends and family to us," said Mr. Heer.
Insurance companies use software to estimate how much it would cost to rebuild your home. This is known as a "replacement cost estimate." Most insurance companies require your home to be insured to full replacement cost - mortgage companies require the same. That software was slow to react to increased building costs at the beginning of the pandemic. But after two years, we aren't seeing construction costs coming back down. This software is finally catching up and insurance companies are realizing that many homeowners are underinsured. So they are increasing the coverage which in turn increases the premiums. Mr. Heer goes on, "I've found that some home insurance companies are still only increasing about 3% annually. To a customer, a 3% increase sounds better than a 10% increase. But this is a dangerous mistake if the house is underinsured by 7%. On a $500,000 house that is $35,000. Then it compounds the next year if you don't correct the problem. If the customer's house burns down, there won't be enough insurance to rebuild it. Then who is at fault - the insurance company, the agent, the rating software company? Meanwhile, the homeowner is left holding the bag."
Since 2017, insurance premiums in the US have increased 11.4% annually on average, rising faster than inflation - and insurance experts expect the rates to stay high. “From everything I know about homeowners’ risk, I expected those numbers to be higher,” said Dale Porfilio, the chief insurance officer at Insurance Information Institute. “Honestly, I would say they still should go up further.” Home insurance rates are rising faster in some states over others. The Insurance Information Institute reported the average annual homeowner insurance rate increases from 2017 to 2020 as:
West Virginia 3.1%
The pandemic has caused high inflation across the economy, but inflation is extremely high in the construction industry. In addition to higher costs of building materials, we are also facing labor shortages, especially in the trades. Carpenters, electricians, plumbers, roofers, and other tradespeople are aging and retiring. Most of their children aren't going into the trades. There are fewer Tradespeople working, yet consumer demand is at an all-time high. Contractors can basically charge whatever they want and people will pay these prices. What's the alternative - do it yourself?
These factors affect insurance premiums because insurance companies are paying out higher claims than ever before. "A roof claim from hail damage used to average around $7,000. Now that number is around $11,000," said Joe Colburn, a claims adjuster. "Put the higher prices together with an active storm season and you have a lot of insurance companies paying out big money."
The two main factors affecting homeowner's rates are the replacement cost of the home and the location of the property. The Mid-Atlantic region has some of the lowest insurance premiums in the country. We don't get earthquakes like the west coast. We don't get hurricanes like the south. We don't get tornados like the midwest. And we don't get snowstorms like the north. But with climate change comes more frequent and more intense storms. These storms cause damage and again insurance companies pay out claims.
A home in Edgewater, MD with tornado damage 9/1/21. Photo from wusa9.com
"I went to South River High School in Edgewater, MD. On 9/1/21 Edgewater was hit by a tornado and the high school was damaged. The same community was hit by a tornado about a year earlier. What are the odds? This sounds like something that would happen in some far-off place like Kansas, not right outside Annapolis," says Mr. Heer.
"I grew up in Cheverly, MD right outside of DC. About a week after the Edgewater tornado, part of Route 50 in Cheverly flooded during an intense storm. After the storm passed around 4 p.m., the road was covered with 5 feet of standing water. The highway didn't reopen for 6 hours. Although this stretch of road sits in a flood plain, I've never heard of that happening before. This is a major highway connecting DC to the eastern suburbs. This happened during the afternoon rush hour. Cars were flooded. Homes and businesses nearby were flooded."
Part of Rt 50 in Maryland with 5 feet of standing water. Photo from www.wtop.com
Most people don't have flood insurance unless their home is in a FEMA-designated flood zone and their mortgage company requires it. But these flood zones are outdated - some haven't been updated since the 1970s. You can search the FEMA flood maps online to see how close your home is to a flood zone. Just because you aren't in or near a zone, doesn't mean your house won't flood. If it rains hard enough and your house is on flat land, at the bottom of a hill, or near water, you are at risk. And homeowners insurance doesn't cover floods.
AUTO INSURANCE RATES ARE NEXT TO RISE
"We aren't seeing Auto insurance rates rising as quickly as Homeowners insurance rates. But I predict that will change," says Mr. Heer. Global new car deliveries are down significantly over the last 2 years. Industry analysts predict it could be 2024 before the automotive supply chain recovers. If you've shopped for a car recently, you've likely paid 10-30% more than you would have a year or two prior. The low number of new cars hitting the market is creating more demand for used cars. In some cases, buyers are paying the same for a 2-year-old car as they would for a new car. There just aren't enough cars.
Drivers are also keeping their cars longer, which require more maintenance. And we have a similar labor shortage of auto mechanics as we have in the construction industry. Cars have way more technology than they did even 5 years ago. Auto mechanics require more training to work on modern cars and that means auto repair shops have to pay them more. And when a car is wrecked, it's much more expensive to repair. A small "fender bender" used to mean you just needed a new plastic bumper. Today's cars have multiple sensors and cameras in them. While these safety features prevent accidents, once a car is damaged it costs $1000s more to repair than it used to.
As more people resume commuting to the office and start attending more social events, we will see an increase in auto accidents. This will result in more claims and the settlements will get larger and larger. We will all end up paying more for auto insurance.
Damaged Tesla Model 3. Photo from ABC News.
Michael Heer is a Property, Casualty, and Life insurance agent licensed in DC, MD, VA, DE, PA, and IL.