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Homeowners Insurance Costs Dynamics, Trends and 2024 Forecast

    The rise in U.S. homeowners insurance costs have been driven by a combination of increasing natural catastrophe losses and extraordinary inflation coming out of COVID, according to the Insurance Information Institute’s report. Even more, Triple-I noted that legal system abuse is also proliferating the cost increases.

    Drivers of Homeowners Insurance Rate Increase examines the dynamics underlying these price shifts and why insurers must be forward-looking in their approach to pricing these policies. 

    Much like Americans are experiencing higher prices for virtually all material goods, a key driver for homeowners insurance has been around the likes of construction materials, which are an important element used when insurers help customers rebuild after catastrophe strikes

    Sean Kevelighan, CEO of Triple-I

    According to Triple-I’s own economic analysis, cumulative replacement costs related to homeowners insurance soared 55% between 2020 and 2022. 

    Americans are moving to places with a high risk of climate disasters

    Americans are moving to places with a high risk of climate disasters

    Triple-I noted that Americans are moving to places with a high risk of climate disasters, such as the Southeast and Southwest, despite extreme weather events increasing in frequency and intensity in recent years. Losses related to natural disasters have increased tenfold from the 1980s to the 2020s (in 2024 dollars).

    Disaster losses along coastal areas are likely to escalate in the coming years, in part because of significant increases in building and development.

    Another unfortunate factor proliferating the rising costs of insurance is legal system abuse, which basically entails billboard attorneys swaying Americans toward litigation as a first step, rather than one of last resort

    “This unfortunate phenomenon is a problem that needs more attention and fixing. For example, one element, which involves third parties funding litigation for profit has virtually zero transparency. Third-party litigation insurance funding has become a multibillion-dollar global asset class of dark money, in which the likes of foreign governments can even invest and profit from the U.S. legal system. Beyond being a potential national security threat, these sovereign funds usually do not pay taxes on these investments,” Sean Kevelighan added.  

    Even before COVID, homeowners insurers struggled to maintain profitability, as premium rates have not kept up with rising costs. The 2023 net combined ratio of 110.9 marked the insurance industry’s worst underwriting results since 2011. In other words, for every dollar taken in, insurers paid out almost $1.11 in claims and expenses last year.

    Rising Costs Keep Upward Pressure on Rates

    Rising Costs Keep Upward Pressure on Rates

    Homeowners insurance costs have surged since the pandemic due to several factors:

    • General inflation
    • Replacement-cost inflation from supply-chain issues and labor shortages
    • Losses from natural disasters, varying by state

    Consumers and policymakers need to understand these dynamics and why insurers must anticipate pricing changes.

    Premium Increases

    According to the Insurance Research Council (IRC), homeowners insurance premiums rose consistently from 2001 to 2021, outpacing household income growth and reducing affordability for U.S. consumers. Disaster-prone states, like Florida, rank as the least affordable for homeowners insurance.

    Legal system abuse, such as false claims of home damage, particularly roof damage, significantly increases insurance costs, especially in disaster-prone areas.

    When thinking about inflation, consumers often refer to the Consumer Price Index (CPI). However, the CPI is just one measure and includes industry-specific metrics.

    Lumber and labor prices are particularly relevant to home repair and rebuilding costs. Although 2023 saw a decline in some metrics, the overall trend shows rising costs. Declines in inflation reflect slower rates of increase, not actual price drops.

    Insurer Profitability

    Insurer Profitability

    Insurers measure underwriting profitability using the combined ratio, calculated by dividing claim-related losses and expenses by earned premium. A ratio below 100 indicates profit, while above 100 indicates a loss.

    Net premiums written, the total premiums paid by policyholders, help assess insurance line profitability and determine rate increase necessity.

    Over $1.2 billion in lightning-related homeowners insurance claims were paid to more than 70,000 policyholders in the U.S., with $194 million attributed to Texas alone, according to report about U.S. Homeowners Insurance Claims for Lightning Losses.

    • The total value of lightning-related claims increased by over 30% in 2023, reaching $1.27 billion from $950 million in 2022.
    • The number of claims rose by 13.8%, from 62,189 in 2022 to 70,787 in 2023, with the top 19 states accounting for 57% of the total.
    • The average cost per claim grew by 14.6%, from $15,280 in 2022 to $17,513 in 2023.

    $950 mn in lightning-caused U.S. homeowners insurance claims were paid out to 62,000-plus policyholders, with $125 mn of the total attributable to California alone

    The widespread damage the U.S. experienced in the past few days due to extreme tornado activity highlighted the importance of being financially protected from catastrophic losses by having the right types, and amounts, of insurance.

    Homeowners Insurance Dynamics and 2024 Forecast

    The table below presents the forecasted and historical year-over-year percentage changes in key metrics related to homeowners insurance from 2024 to 2019.

    Metric2024F20232022
    Underlying Growth (%)-2.34-5.41.7
    Housing Unit Starts (%)-10.91-12.3-4.2
    Residential Construction Employment (%)4.160.86.1
    Retail Sales (%)8.262.38.9
    Replacement Costs (%)8.162.59.4
    Shelter (%)7.887.55.9
    Household Furnishings & Supplies (%)7.42.99.7
    Construction Materials (%)9.21-2.912.6
    Source: Triple-I
    • Forecasted to improve to -2.34% in 2024, indicating a potential recovery from the negative trend in 2023.
    • Expected to continue its decline, though at a slightly slower rate of -10.91% in 2024.
    • Predicted to grow by 4.16% in 2024, suggesting a rebound in the labor market for residential construction.
    • Projected to increase by 8.26% in 2024, reflecting a stronger consumer market.
    • Anticipated to rise by 8.16% in 2024, indicating continued inflationary pressures in home repair and rebuilding costs.
    • Expected to grow by 7.88% in 2024, maintaining the upward trend in housing-related expenses.
    • Forecasted to increase by 7.4% in 2024, showing sustained demand for home improvement goods.
    • Predicted to rise by 9.21% in 2024, suggesting ongoing volatility in material costs.

    In 2023, the net combined ratio for homeowners insurance was 110.9, the worst since 2011. However, the net written premium growth rate of 12% was the highest in over 15 years, indicating rate increases to offset loss costs.

    Net Combined Ratio and Change in NWP

    Net Combined Ratio and Change in NWP
    Source: Triple-I
    • Industry data from the National Association of Insurance Commissioners (NAIC) and Florida Office of Insurance Regulation (OIR) shows average statewide home premiums were $3,340 in 2023, 80% less than Triple-I’s estimate of $6,000.
    • In 2022, average Florida premiums were $3,040, 41% less than Triple-I’s estimate of $4,300.

    Claims-related litigation has decreased, the “depopulation” of the state’s insurer of last resort is progressing, and underwriting profitability has improved, though it remains negative.

    Cumulative Insured Losses in 2024 Dollars

    Cumulative Insured Losses in 2024 Dollars
    Source: Triple-I

    Improved profitability signs emerged in late 2023, with the direct incurred loss ratio at 42%, the lowest since 2015. This trend continued into the first quarter of 2024, with the ratio at 56.8%.

    Future Prospects

    The potential for the U.S. Federal Reserve to lower interest rates due to inflation moderation could boost home sales and homeowners insurance growth. However, insured losses have risen over the past 30 years, primarily due to severe hurricanes and convective storms.

    Insurers are encouraging homeowners to invest in weather-resistant roofing and other resilience measures. Combined with efforts to combat legal system abuse and decreasing inflation costs, homeowners insurance lines are poised for recovery.

    Homeowners insurance dynamics indicate a mixed outlook for 2024. While some areas show signs of recovery, such as employment in residential construction and retail sales, others like housing unit starts and replacement costs continue to present challenges.

    Insurers and policymakers must remain vigilant and adaptive to these trends to ensure market stability and affordability for consumers.

    Insurers play a vital role in the economy, protecting against financial losses due to unforeseen events such as natural disasters

    “However, if insurance companies were to become unprofitable and unable to meet their financial obligations, it leaves policyholders without coverage when they need it most.”

    ………………….

    AUTHOR: Sean Kevelighan – President and CEO at Insurance Information Institute (Triple-I)