Four Actions You Can Take to Help Mitigate Rising Homeowners Rates
By Lauren Dallas, Personal Lines Manager
Annual increases in property insurance — whether dwelling/homeowners coverage or commercial property insurance — are not unusual. We typically see dwelling coverage increases around 4% to account for standard inflation from year to year. But homeowners approaching renewals this year are seeing significantly higher increases in their dwelling coverage— in part due to higher-than-historical inflation — sometimes increases of 10% or more. When the dwelling coverage increases, so does the premium.
In the past, whenever premium increases exceeded what was typical, policyholders had options they could explore with other carriers. However, higher rate increases are fairly universal across all carriers today, as the drivers of those premium increases are impacting all insurers fairly equally, leaving fewer alternatives to explore by changing insurance companies alone.
It is important to understand what is driving these inflationary premium increases, as carriers will reward certain actions that they want their customers to take in order to help defray some of the cost increases that the insurance companies are incurring themselves.
What Is Driving Property Insurance Inflation?
There are two primary drivers of cost increases that homeowners are experiencing at renewal. When these two universal economic drivers are combined with a third case-by-case factor, what results is an imperfect “trifecta” that can return surprisingly higher quotes for the policyholder.
1 - Historically High Inflation Raising Replacement and Construction Costs
As we have been demonstrating for more than a year now, the much-publicized increase in inflation has touched both personal lines and commercial lines in unfortunate but understandable ways. As the costs of materials, labor, transportation and supplies have dramatically escalated in recent years, so too have the replacement costs for restoring or rebuilding a property following a loss. As those costs rise, so too must insurance premiums to account for those increases in what insurance companies must outlay to make homeowners whole after a fire, storm, or water and wind damage. It is basic economics, and in the end, it is the policyholder that ends up bearing a portion of the escalation in costs.
2 - Ahistorical Catastrophic Loss
As if higher-than-normal inflation wasn’t enough, the last couple of years have also coincidentally experienced an unusually high number of severe catastrophic losses across the country. From wildfires in California and Colorado to severe damage caused by hurricanes in Florida, insurance companies have experienced nearly unprecedented claims loss. Some have experienced double the typical catastrophic loss in 2023. And it’s not just confined to Florida and California. Michigan has been no stranger to severe weather events recently and even had wildfires of its own to contend with this summer. The end result is financial distress for the insurance companies that pay to restore properties following catastrophic events, as well as higher-than-usual inflation in reinsurance rates that insurance carriers pay for to protect their own balance sheets from financial disaster.
Add them together — higher inflation and more severe catastrophic losses — and you have a recipe for higher costs being passed along, in part, to the consumers. Add a third ingredient, and you really have a recipe for unexpected rate increases come renewal time.
3 - Claims History
If you, yourself, fell victim to a loss necessitating a claim be filed, this creates the unfortunate and aforementioned imperfect “trifecta.” Filing claims — while often necessary and out of the insured’s control — does have the potential to result in higher premiums in the future. Having a claim in this current inflationary environment will only exacerbate the two factors already conspiring to raise rates.
Steps to Take to Help Offset Rising Insurance Costs
Though so much of this is largely out of the hands of policyholders, there are a few actions that consumers can take to make sure they are doing everything within their power to help mitigate these rising costs:
1 - Consider Higher Deductibles
A higher policy deductible will contribute to lower homeowners premiums. Some carriers are even insisting on a minimum deductible of $2,500, and we are often urging clients to consider a $5,000 deductible. Most policies will now also mandate a separate wind and hail deductible. This practice of “self-retention,” whereby homeowners are retaining some of the risk by self-insuring losses up to that $5,000 level, is one of those desired actions insurance companies prefer their policyholders to take, so they will reward that with lower premiums than would otherwise be the case. Should the worst come to pass, the difference between a $2,500 and $5,000 deductible would be negligible.
2 - Be Conservative with Claims
By exercising a degree of self-retention, homeowners should then be judicious about filing claims. For one, anything smaller than a $5,000 loss would not necessitate the filing of a claim. By refraining from filing smaller claims, you are keeping a “clean” claims history, which protects you from adding that third ingredient to the “trifecta.” The concept of insurance was originally intended to protect the homeowner from a major, crippling loss…not as a maintenance program for minor damage remediation. The insurance industry is moving to get us back to its original intent by mandating these higher deductibles.
3 - Practice Preventative Maintenance
Now more than ever, homeowners should be proactive about doing everything they can to avoid preventable losses and claims. For example, that creaky old dead tree limb hanging over the garage? Maybe it’s time to cut that down before it falls on the garage and causes severe damage. Make a modest investment in a water leak detector that can alert you to a leak in the home and allow you to address the issue before it causes major damage. Or even consider making the larger investment in an automatic water shut-off, especially if you’re one to travel a lot and spend significant amounts of time away from the home, when unattended leaks can lead to severe damage and loss.
4 - Have Your Agent Do the Shopping For You
If you haven’t had a trusted advisor shop your policies around to multiple carriers recently, you may be renewing without exploring the many options available to you, thereby missing out an opportunity to save money without sacrificing coverage.
At a time in which a number of insurance companies are pulling out of entire states, or when certain carriers have chosen to stop offering whole lines of policy type (such as property), there is no overstating the impact that inflation and catastrophic loss are having on insurance companies. The burden of those increases will be shared by policyholders, unfortunately. The best you can do to insulate yourself from the effects of these factors is to consult with an agent who has your interests at heart, first and foremost. Only then will you be confident that you are making the best out of an unfortunate combination of circumstances.