Some U.S. states are noticing an increase in their homeowners insurance rates. There are a number of reasons for this trend.
The rates have been poor for many years, with insurers paying out more in claims than they received in premiums, after accounting for the expenses insurers incur when running their businesses on a daily basis. In fact, from 2005-2008, U.S. homeowners insurance premiums grew more slowly than the rate of inflation. And in 2011, some insurers began filing for rate increases in a few states to get their homeowners rates back to levels that would provide the company with the capacity to pay future claims while also maintaining their long-term solvency.
Rising homeowners rates also reflect the growing prevalence and extremity of natural catastrophes. In 2010 the federal government provided disaster relief for 81 natural disasters – a record number at the time. This record was broken in 2011, when there were 99 federal disaster declarations. To put this in historical perspective, In the 14 years prior to 2010, the number of disaster declarations made by the U.S. federal government ranged from 44 to 75, averaging 57 a year.
2011 is known to be the most expensive years for insurers in global history, as well as in the United States. Moreover, some of the areas strongly hit by big storms in 2011 are not areas of the U.S. that insurance companies expected to have a great concern of risk. The enormous spring tornado season in the U.S. in 2011, along with harsh winter weather and the $5.5 billion in claims payouts arising out of Hurricane Irene in August, reduced the property/ casualty insurance industry’s cumulative policyholder’s surplus – the amount of money remaining after an insurer’s liabilities are subtracted from its assets – to $550.3 billion as of December 31, 2011, from $559.2 billion at December 31, 2010, a nearly 2 percent drop.
Furthermore, a great concern from the industry’s point of view, was the 3.5 percent rate of return the industry realized on its policyholders’ surplus in 2011. It was the eight lowest full-year rate of return since ISO started documenting this number in 1959. Due to the low interest rates, insurer’s investment portfolios have been negatively affected. The investment income generated from insurers is used to pay for the expenses, claims and potential future claims. When the interest rate declines, insurance companies depend on charging increased premiums.
The biggest concern for homeowners insurance companies is immediate need of funds in an event of a catastrophe. From an insurer’s point of view, their needs arise mostly when natural disaster occur and buying insurance can help prevent financial trouble. For such companies, such protection is called reinsurance – essentially insurance for insurance companies. And just as with homeowners and other types of property insurance, the same pressures drive up the rates for reinsurance, which in turn, increases the costs the insurers bear.
Lastly, homeowners insurance rates have been affected by construction costs. The cost of building a home rose by 45 percent from the start of 2001 through the end of 2011. The annual construction price (e.g., the cost of labor and materials) change in 2002 was -0.4 percent higher than the previous year. In 2011, it was +5.9 percent above where in sold in 2010.