By Remmie Butchko, CIC
Georgetown Insurance Service, Inc.
Silver Spring, MD
“Why did my homeowners insurance premium increase? I haven’t made any claims.”
When it comes to homeowners insurance, this is a common question. And often, many people don’t like the answer. When it comes to premium increases, the causes are usually external and not directly related to an individual’s situation or claim history. So, unfortunately, there isn’t much homeowners can do to prevent price hikes. Here are some contributors to recent spikes in homeowners insurance premiums:
Natural disasters happen in all parts of the world, including the United States. But recent years (2018 in particular) have brought a number of events that were not only severe but also geographically widespread events, resulting in some hefty insurance claims. Here are some examples:
Hurricanes: In 2018, Hurricane Florence dropped an incredible 24-36 inches of rain on the Carolinas. In Florida and surrounding states, Hurricane Michael brought the strongest winds seen in the U.S. since Hurricane Andrew in 1992. And two years ago, in 2017, Hurricane Harvey dropped a whopping 60 inches of rain on Texas, primarily in the Houston area.
Wildfires: We’ve experienced an historically large number of wildfires in recent years, including Campfire, which was the deadliest wildfire in documented history resulting in 86 fatalities.
Flooding and Mudslides: A massive mudslide wiped out the entire town of Montecito, CA last year. The Midwest also continues to be plagued with flooding.
Tornados: Recent years have brought some of the most frequent and severe tornados in history.
Increased Construction Costs
Most homeowners’ policies today are written on a replacement cost basis. This means that, in the event of a loss, the insurer must pay to rebuild your home—not just pay what it’s worth (the depreciated cost). But when construction costs go up it can drastically affect the replacement cost of homes, thereby also affecting your insurance rates. Some of the factors that can cause construction costs to rise include:
Material costs: The increase in home construction in recent years has driven up the demand for building materials, in turn driving up the cost of those materials. Another contributing factor to increased building material costs happened because of the last recession. During that time, many production facilities scaled-back their output due to lower demand. Simply put, higher material costs translate to higher homebuilding costs, all leading to higher insurance premiums.
Demand for Contractors: Because of the recent increase in home construction and remodeling there’s a higher demand for contractors to perform the work. Less contractors to perform the work means increased prices. Why? Because with so much work available, contractors don’t have to be as competitive with pricing. In fact, a builder we insure recently told me they are booked solid for the next 18 months!
Changes in code: Depending on the location of your home and existing local ordinances, there may be changes to codes that affect the replacement cost of your property in the event you need to rebuild. These days, most jurisdictions require a home to be rebuilt to current code—not as it stood prior to the loss. Some examples include fire suppression systems and heavier construction materials, particularly homes rebuilt in windstorm-prone areas.
Many people don’t realize that one of the most important components of a homeowners’ policy is its ability to cover the residing individual or family members for a wide variety of liability claims. In recent years there has been a huge increase in these types of claims, mostly libel and slander claims stemming from social media. Other examples could include:
- A parent whose part of the PTA makes a nasty comment about another parent in an online chatroom
- A child posts on Facebook, Twitter or Instagram calling their new teacher a derogatory name and/or term and the teacher finds out
- A group of male students create a survey ranking the female students on their looks and one of the girl’s parents discovers the survey
Premium increases can be incredibly frustrating, hard to manage, and difficult to understand—particularly if you have had no claims filed against your policy. As a homeowner, it’s important to keep in mind that your policy, even at increased rates, would be totally invaluable should a disaster or unforeseen situation strike your home or community.
Have questions? Contact us to speak with a licensed insurance professional.