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Inflation and extreme weather are expected to deliver another blow to home insurance costs in 2023.
The last two years saw home insurance cost hikes. The average home insurance rate increased by 9% in 2021, which eclipsed the 7% average rate hike the previous year, according to the Insurance Information Institute. Homeowners should expect more of the same in 2023.
Here are homeowners insurance trends that we can expect in the coming year.
Inflation Leads to Higher Home Insurance Claim Costs and Rates
The Consumer Price Index increased by 7.7% over the 12-month period that ended in October 2022. Earlier in the year, the index grew a whopping 9.1% in the 12 months that ended in June. That jump was the largest increase in 40 years.
These inflationary costs are leading to higher home insurance claim costs and squeezing home insurers. Inflation directly influences home insurance rates because “the bulk of policyholder premium is spent repairing and restoring property,” says Tom Larsen, associate vice president of hazard & risk management at CoreLogic.
Cost increases in building materials and labor accelerated in 2022, which will lead to higher home insurance costs in 2023, says George Hosfield, senior director and general manager for home insurance at LexisNexis Risk Solutions.
“As we look at 2023, you’re going to continue to see upward pressure of insurance premiums largely driven by inflationary costs,” Hosfield says.
Supply Chain Concerns Remain
Supply chain issues caused disruptions during the height of the Covid-19 pandemic in 2020 as lockdowns, labor shortages and distribution bottlenecks caused empty shelves and Americans scurrying for basic items like paper towels.
Those issues for basic necessities are largely in the past, but supply chain problems remain for building materials. These supply chain issues are leading to more expensive construction costs, home insurance claims and, as a result, home insurance rates.
Increased replacement cost value for homes is the primary home insurance rate driver in 2022 and should continue into 2023, says Mark Friedlander, a spokesperson for the Information Information Institute. He adds that replacement value costs are increasing at double the U.S. inflation rate.
“The higher replacement cost is a result of supply chain disruption and spikes in construction materials and labor. This has been a growing trend throughout the pandemic,” observes Friedlander.
Extreme Weather Drives Risk
Extreme weather, including hurricanes, freezes and wildfires, has led to higher home insurance quotes and caused multiple insurers to go out of business or drop policies in high-risk areas.
A recent LexisNexis Risk Solutions report found that home insurance claims cost increased by 7% in 2021, partly because of extreme weather-related claims.
The report found that weather-related insurance claims for water damage increased by 329% between 2020 and 2021, and catastrophic claims rose by 222%. Louisiana and Texas had the biggest home insurance losses, while Colorado and Nebraska saw the highest average loss costs over the past seven years.
Louisiana had two Category 4 hurricanes—Laura in 2020 and Ida in 2021— that led to more than 800,000 property claims, resulting in $22 billion in insured losses. Friedlander says those losses led to “turmoil in the state’s home insurance market.”
Hurricane Ian decimated parts of Florida in 2022 and gave another wallop to the Florida home insurance market. Friedlander says the Insurance Information Institute estimates insured losses may top $60 billion, making it the second-largest insured loss event in U.S. history, behind only Hurricane Katrina in 2005. These losses will result in higher home insurance rates in Florida and Gulf Coast states in 2023, says Friedlander.
More than 75% of Florida residents live in coastal communities. Friedlander says there are similar population trends in other coastal states along the eastern seaboard, putting them more at risk of weather-related home insurance claims.
It’s not just hurricanes causing home insurance problems. Freezes in Texas, wildfires in California and tornadoes and storms in the midwest have led to billions of dollars of home insurance claims. Larsen says 2022 weather-related losses might not affect home insurance rates in those areas until 2023 since it takes a year for home insurance companies to implement new rates.
“Insurers of Last Resort” Stretched
Multiple factors have caused problems for home insurance companies, which have sought hefty rate hikes. Insurers have to file their rate increases with state insurance departments and seek approval.
“If an insurance company can’t get the rate that they think will make them solvent, they won’t write new policies,” says Hosfield.
Multiple insurers have closed, stopped selling new policies or fled high-risk states. This trend has caused millions of policyholders to turn to their state’s home insurer of last resort.
In Louisiana, weather-related claims led 11 small regional insurers to fail. Another 12 insurers left the state and more than 50 others aren’t writing new business in hurricane-prone areas. The state-run insurer of last resort, Louisiana Citizens Property Insurance Corp., has seen its policyholders triple since January 2021, says Friedlander.
To offset those costs, Louisiana regulators recently approved a staggering 63% average home insurance rate hike for Louisiana Citizens Property Insurance’s 114,000 home policyholders. The rate increase is effective Jan. 1 2023, and won’t affect current Citizens policyholders until they renew their policies after that date. Friedlander says private home insurance companies may follow with their own substantial rate increases.
Florida’s state-run insurer of last resort, Citizens Property Insurance Corp., saw its policyholders grow to over 1 million members, after multiple home insurance companies went out of business or stopped selling policies in the Sunshine State.
Florida’s problems aren’t only weather-related. Roof replacement claim fraud schemes and excessive litigation against insurers caused instability in the home insurance market. Nearly 80% of all property claim lawsuits in the U.S. were filed in Florida last year. Friedlander says no other state had more than 3,600 property claim lawsuits in 2021, including California, which has nearly twice the population size of Florida.
The Insurance Information Institute predicts Hurricane Ian litigation expenses to potentially reach $20 billion, which could further strain small, regional insurers that may fail.
Florida allowed its state-run insurer of last resort, Citizens, to increase home insurance rates by an average of 6.4% in 2022, which was below what Citizens requested (11%). Friedlander warns that the lower average increase may cause Citizens Property Insurance to struggle, especially since Citizens is expected to balloon to 1.5 million policyholders in 2023.
“The company’s risk exposure continues to increase because of the turbulent private market and the lack of options for consumers,” Friedlander says.
Beyond Gulf Coast states, California’s FAIR plans (Fair Access to Insurance Requirements), which is a consolidation of insurers that provide safety net policies, has also increased its policyholders. The California Department of Insurance said FAIR Plan policies rose by 49,049 policies in 2020 to a new high of 241,466 policies in 2021.
Fewer insurers selling policies and more homeowners relying on safety net home insurance policies isn’t a good combination for policyholders.
“Fewer options for policyholders is generally acquainted with increasing rates,” says Larsen
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