According to the Insurance Information Institute, the 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 must know how insurance companies calculate the cost of insurance.
Most homes are insured for replacement cost value, i.e., how much it will cost to replace or rebuild the home if it is destroyed. To a large extent, this amount depends on the cost of labor and materials that go into constructing the 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.
That’s what has happened over the last couple of years. When COVID hit the United States, lumber producers became so afraid the Great Recession was going to repeat itself, 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 was worsened by the decision to increase the tariff on Canadian lumber from 9% to 18%.
Apart from that, the price of labor also increased sharply during the pandemic and people stopped working. Workers feared catching the disease, and many of them decided to stay at home, choose alternate career paths, relocate and/or retire early. Unusually severe natural disasters also affect the cost of home insurance. An insurance company is a business like any other, and if their actual expenses far exceed the total claims they project or forecast for the year, it could easily cause financial consequences threatening their ability to respond to future claims. The only way a carrier can recover those losses is by passing them on to policyholders by 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.
Do you Have Enough Coverage?
Because of the increased cost to replace or repair your home, it would be a good idea to review the amount of coverage you have on your home. It’s possible that todays’ cost of replacing or repairing your home now exceeds the amount of coverage you have in place.
An additional consideration has to do with the amount of coverage your policy provides you for housing when you can’t live in your home while your home is being rebuilt or repaired. If it takes longer to rebuild or repair due to labor shortages and/or material costs, it’s possible those costs exceed your coverage limits as well.
How Can Homeowners Keep the Cost of Home Insurance Low?
Fortunately, there are a few things homeowners can do to keep their home insurance premiums in check.
Work with an independent agent. We work for you, not a specific insurance company. As such, we are able to shop across top-tiered insurance companies for coverage and rating comparison purposes. Not all insurance companies are equal.
Increase your deductible. The deductible refers to the amount the homeowner has to pay when they submit a claim. Increasing your deductibles can help reduce your insurance premium.
Make your home more disaster-proof. Update your roof and implement the use of water monitoring and leak detection technology. Such updates to your home’s plumbing, heating, and electrical systems can mitigate the risk of fire and water damage. And having a burglar alarm installed could help reduce your home insurance premiums.
Final Thoughts on Home Insurance
Home insurance is a more complex topic than many people realize. The typical homeowner’s insurance contract is filled with technical terms, and it’s easy to misunderstand some of the clauses. Working with an independent insurance agent can help you avoid many of the potential policy pitfalls, as well as locate and secure competitive rates from the open marketplace, rather than one company. Feel free to contact us if you have any questions.
