Many home insurance premiums are rising faster than inflation

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

“I noticed that our mortgage had increased by $ 100 on a mortgage of $ 1,250,” he said. “So I looked into this. First I called the mortgage company and they said, “Insuring your home is much more expensive. Talk to [the insurance company]. ‘ So I called the USAA and I said, “What’s going on?”

Across the country, homeowners renewing their policies are finding that rising material costs, supply chain disruptions and climate change combine to drive premiums up from an average of 4% to an average annual premium of 1 $ 398, according to the Insurance Information Institute, a nonprofit organization. known as Triple-I which provides information on the insurance industry. Triple-I uses data from Standard & Poor’s Global Market Intelligence for its analysis.

Since 2017, premium rates have risen by 11.4% on average, meaning they are rising faster than inflation – and insurance experts expect rates to remain high.

“From everything I know about homeowner risk, I expected these numbers to be higher,” said Dale Porfilio, director of insurance at Triple-I. “Honestly, I would say they should go further up.”

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

The cost of home insurance depends on several factors. Location often drives up costs, especially if the home is in an area prone to natural disasters. Some areas have higher rates because it costs more to rebuild a house there. A home’s resistance to natural disasters – for example, if it was built to withstand an earthquake – can affect rates.

When Hoagland spoke to his insurance agent, he learned that increases in his insurance premium were linked to rising lumber prices, a severe shortage of skilled labor, and inflation. All of these factors increased the cost of replacing her house. The insurance company calculated the cost of rebuilding their 1871 Tuscan-style home in Berkley Springs, W.Va., which he bought for $ 265,000 less than two years ago, at $ 625,000.

“My first instinct was that this was some kind of insurance company scam,” 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 replied, “No, that’s the only insurance we offer. “

Most homeowners want their home back to how it was before the event destroyed it, so the replacement cost – the cost to rebuild the home as it was – often differs from the value of the house. The replacement cost also does not take into account the value of the land. In some cases, the cost of replacing a home is less than the home’s value because the land value is high in that area.

“We provide what’s called replacement cost coverage,” said Karen Collins, assistant vice president of personal insurance at the American Property and Casualty Insurance Association, the largest insurance trade association. “We want to rebuild, replace what you had before. We try to estimate this on an inflation factor. But when you have such an abnormal inflation rate, these automated processes may not always follow. “

Rising raw material costs, especially lumber, and supply chain disruptions add to the bottom line. When the pandemic struck, lumber producers feared a repeat of the Great Recession. They cut back on production and offloaded stocks. But demand skyrocketed, taking them by surprise. Lumber prices climbed to $ 1,500 per thousand board feet in March, a 400% year-over-year increase. The Biden administration’s decision in November to double the tariff on Canadian lumber to 18%, from 9% under the Trump administration, also affected prices. Canada has been the United States’ largest lumber trading partner, providing about 30% of the US supply.

“Right now, lumber prices are around $ 900 per thousand board feet,” said Robert Dietz, chief economist for the National Association of Home Builders. “Domestic lumber production has not really increased in the United States. Saving timber prices when we are trying to fight inflation makes no sense.

The supply chain bottleneck has also made refrigerators and stoves more expensive and scarce. A survey by the NAHB of its members in May found that equipment shortages were more prevalent than at any time since the NAHB began tracking the problem in the 1990s. the rarest items, followed by lumber.

“It takes longer to build and costs more,” Dietz said. “Using the [Producer Price Index] Inflation data, we’re building a basket of goods related to residential construction, and right now those prices are up about 19% year over year. “

Climate change is also contributing to higher rates. The year began with a devastating winter frost in Texas, which resulted in the state’s largest non-hurricane-related climate loss event. Hurricane Ida, which struck in late summer, is expected to be among the five costliest hurricanes in U.S. history. It is too early to calculate the losses caused by the tornadoes that ravaged eight states in early December.

Porfilio said insured damage from tornadoes, hurricanes, severe storms, wildfires and other natural disasters reached $ 82 billion this year, bringing the total from 2017 to today to more than $ 400 billion.

“Climate risk continues to put pressure on everything weather-related,” Porfilio said. “We are seeing more severe hurricanes, more severe forest fires and the science is not as clear on tornado events in terms of whether or not they change in frequency. But what we really do know is that gravity is increasing. “

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

“What typically happens when an event destroys or seriously damages hundreds of thousands of people in a metropolitan area is that the prices of building materials in those markets tend to be high for about six, sometimes as high as at nine months, ”Dietz said. “You get an increased labor shortage in the market and neighboring markets, as much of the labor and construction know-how is devoted to the renovation industry for the efforts of repair. “

Due to the increase in natural disasters, some insurance companies are offering extended replacement cost coverage at an additional cost.

“After a natural disaster, a generalized incident, [there is] an increase in demand… where costs increase because demand increases immediately afterwards, ”Collins said. “So the normal cost of rebuilding, replacing, suddenly changes. An extended replacement cost rider, which is optional, gives you additional cushion for that particular increase in demand. “

Home insurance costs are rising faster in some states than in others. According to data from Triple-I, Colorado experienced a 21% increase in average annual premiums for home insurance from 2017 to 2020. Rates in Texas increased by 18% during this period and those in California. by 9.6%. DC saw a 3.2% increase; Maryland an increase of 13.4% and Virginia 14.8%. West Virginia, where Hoagland is home, rose 3.1%.

Although insurance companies are filing rate hikes to keep up with rising costs, they are being held back somewhat by state regulators. California is one example. Although the state has been ravaged by wildfires, homeowners’ insurance premiums have not kept pace with increasingly expensive claims.

“There are some constraints on how quickly insurers can adjust their rates,” Collins said. “You can have [states] who have not experienced the same amount of rate increases simply because the carriers are still in this negotiated deposit process which stretches out for a long time.

Whether the increases are small or large, there are ways to save money on home insurance premiums. Hoagland chose to increase his deductible from $ 1,000 to $ 2,000, which reduced his home insurance by approximately $ 500 per year.

On its website, Triple-I lists 12 ways homeowners can lower the cost of their premiums, including shopping, bundling home and auto insurance, making the home more resilient to disasters, and improving home security. .

While 2021 may prove to be a bumper year for natural disasters and rising inflation, it could be some time before home insurance premiums moderate.

“I think [homeowners insurance premiums] must increase at a faster rate than this in the future due to climate risk as well as inflationary pressures on repair costs, ”Porfilio said. “The reality is we should all expect them to go up because costs typically go up and all of our insurance policies reflect costs. It is therefore a question of relative size. I believe, and we have a lot of data to show it, that rates should go up more than they have been. I think there is a bit of catching up to do. “

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