Home insurers are charging more and insuring less

Home insurers are charging more and insuring less
Home insurers are pushing more risk onto homeowners as they insure less and charge more in premiums. This is the consequence of several years of deep losses for insurers. Home insurers are struggling to reach profitability again after losing money for five of the last six years. Insurance claims have been both costly and frequent due to storms, natural disasters, inflation, and supply chain issues. There is an argument that house prices have risen so sharply, that insurance premiums have been lagging for some time, and had to accelerate at some point. While costs have certainly risen, the amount of severe weather is a significant driver of insurance losses.
Regulatory curbs on pricing mean that insurers can not adequately cover the cost of doing business and leads them to just exiting markets entirely.
Home insurers are now on the offensive as they seek to claw their way back to profitability. There have been double digit rate increases approved in 31 states.
Insurers are getting more selective with the policies they write.
Insurers are exiting areas that are vulnerable to disaster like California, Florida, and Louisiana.
Insurers are reluctant to write policies for older homes or homes that lack wind mitigation.
Insurance companies are managing terms and conditions such as deductibles, roof age eligibility, and coverage levels on roof replacement. For example, coverage for older roofs may be limited to their cash value rather than their replacement cost. Coverage has been cut for wind and hail damage by increasing the deductible.
Natural disasters and severe weather are increasing losses
However, recently, there has been a slowdown in the increase in repair and replacement costs. Total reconstruction costs were up 1.6% this year versus more than 7% in the last three years. However, the second half of this year will determine a lot of what happens to both insurance prices and the insurance industry in general.
This summer’s heat wave has warmed the waters of the Gulf Coast which will increase the likelihood of hurricanes, as well as providing fuel for California wildfires.
There have been severe storms across the Midwest.
Insured damage in the US exceed $90 billion in the past three years. This is higher than the inflation adjusted average of any of the four previous decades such as $54 billion in the 2010s and $40 billion in the 2000s. Catastrophe losses were 92% of home insurance premiums for Progressive in June.
Catastrophe losses will likely remain elevated for some time.
Growth in vulnerable geographies
Population shifts into vulnerable areas are adding to the underlying costs of global warming. While I think the Midwest is a great place to live, it is not as romantic or exciting as living near the water in Florida or the gulf. We do not have the elevation and mountains that are in California. I’ve been especially surprised at how southwestern markets like Phoenix have boomed. These are geographically vulnerable areas that may not be good long term bets.
Reinsurance
Home insurance companies buy reinsurance coverage to pass on some of their risk. Premiums for reinsurance have risen sharply. Insurers must pass these costs onto consumers to be profitable and justify operating in specific geographies. State regulators control how much of these costs can be passed onto consumers. When state regulators are overly prohibitive in their cost controls of insurers, insurers are more likely to exit the state entirely, which is what we saw in California.
Reinsurance premiums are up an average of one-third for June 1 renewals, and 50% for January 1 renewals.
If there are more insurance claims in the second half of this year, that will continue to drive up the price of reinsurance, and in turn, the price of our insurance premiums as consumers.
There has been a massive run up of real estate values in the past years. You would expect a corresponding increase in insurance prices to offset higher real estate values. What may be occurring is catch-up of the insurance premiums to property values.
What I say next will likely anger a lot of my conservative audience, but I have committed to always being truthful with my analysis of the situation in the market and country. While it is true that the prices of everything from construction materials to labor have risen sharply, I do not think we can ignore that the frequency and intensity of storm damage and natural disasters has increased. Arguments about climate change are beyond the scope and focus of this channel. Whether it is due to poor forestry management by California and Canada, wildfires seem to be increasing. Also, the gulf waters are getting warmer which will lead to greater losses in Florida and the gulf coast. To mitigate the effects of what is occurring, I would propose we do not build out vulnerable areas of the country and increase our building standards. We need to build houses with higher elevations so they are more resistant to storm surge and flooding. I have long wondered if FEMA and federally subsidized flood insurance subsidizes and encourages bad behavior. Let’s explore this subject in another video. Be sure to like and subscribe so we can continue our journey together in financial and economic analysis.
Works Cited:
https://www.wsj.com/articles/home-insurers-are-charging-more-and-insuring-less-9e948113?mod=hp_lead_pos7
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