Why is Insurance Getting So Expensive?

Key Drivers of Growth in Homeowners Insurance Premiums

The price of insuring American homes started to dramatically increase in 2021. As we've outlined in prior publications, insurance premiums grew 10% annually from 2019-2024, outpacing home value appreciation (9% annually) and the consumer price index (4% annually) over the same period. Several key factors contribute to this increase and are outlined below.

1. Construction Cost Inflation

Insurance costs are directly related to the construction cost of homes themselves. Construction costs grew dramatically following supply chain challenges during COVID. In turn, insurance carriers raised the dwelling coverage limits for homeowners to make sure homeowners were sufficiently insured. Even with stable insurance rates, these coverage limits directly increase premiums at renewal. While this may seem obvious, it's important to acknowledge the nuance here; construction costs and market valuations of properties are two very different concepts; construction costs only consider the cost of repairing or rebuilding a structure (timber, drywall, stone, glass, concrete, steel, labor), while market value includes the value of the land itself. Comparing insurance coverage limits (construction cost) to the market value of a home is not always a relevant exercise.

2. Physical Characteristics of Homes

Some types of homes are more likely to be damaged by insurable perils than other homes. While this is typically already reflected in insurance pricing when the policy is originally quoted, it can also drive changes in premiums over time as expectations of future perils shifts, in part due to climate change. Old roofs, weaker construction types and older homes are all important physical characteristics that drive increased expectations of losses for insurers.

3. Regulatory Dynamics Reducing Insurance Competition

US homeowners insurance is regulated by state insurance commissioners, who play a major role in managing pricing, competition and availability of standard homeowners insurance. In some states where insurable losses have grown, carriers started to raise premiums to maintain their target profit margins. In an effort to maintain affordability and predictability for homeowners, insurance commissioners in some states started to reject these large rate increase requests from insurance carriers. With insurance pricing artificially stuck at unprofitable levels, some carriers stopped writing new business in those geographies. As fewer insurance companies existed in certain markets, competition fell and pricing power grew. In extreme cases, state insurers of last resort took over, providing expensive policies with reduced coverage. Due to these regulatory dynamics, the share of US homeowners unable to get standard homeowners insurance peaked at 3% in 2023. Fortunately, due to pressures from homeowners and insurance companies, many high-risk states have started to deregulate insurance pricing to incentivize new insurance carriers to write new policies. As a result, the number of policies insured by state insurers of last resort began to fall in 2024, with a positive outlook for the future.

4. Increasing Probability of Loss from Insurable Perils

Insurers are in the business of charging slightly more premiums than they pay out in claims. Because of this dynamic, expectations of future claims at a customer's home is the major driver of insurance pricing. Insurers have noticed that damage from major insurable US natural disasters has grown 10% annually, causing them to expect higher losses in the future. Some of these expectations are driven by climate change. These expectations are reflected in higher rates of insurance for homeowners.

Conclusion

Insurance is clearly driven by a complex interplay of factors across construction cost inflation, physical home characteristics, regulatory dynamics and climate change. For homeowners, this means being proactive against rising insurance premiums is more important than ever. Fortunately, Eventual is obsessed with protecting real estate owners against this risk. Premium Lock is a simple, affordable and obvious choice.