Rising property insurance costs driven by inflation, cost increases, other issues

The recent rise in U.S. homeowners insurance costs have been driven by a combination of increasing natural catastrophe losses and extraordinary inflation coming out of COVID, according to the Insurance Information Institute's (Triple-I) latest Issues Brief. Even more, Triple-I noted that legal system abuse is also proliferating the cost increases.

Trends and Insights: Drivers of Homeowners Insurance Rate Increase (https://www.iii.org/sites/default/files/docs/pdf/triple-i_trends_and_insights_homeowners_insurance_rates_07092024.pdf) examines the dynamics underlying these price shifts and why insurers must be forward-looking in their approach to pricing these policies.

"Much like Americans are experiencing higher prices for virtually all material goods, a key driver for homeowners insurance has been around the likes of construction materials, which are an important element used when insurers help customers rebuild after catastrophe strikes," said Sean Kevelighan, CEO of Triple-I. "According to Triple-I's own economic analysis, cumulative replacement costs related to homeowners insurance soared 55% between 2020 and 2022."

Triple-I noted that Americans are moving to places with a high risk of climate disasters, such as the Southeast and Southwest, despite extreme weather events increasing in frequency and intensity in recent years. Losses related to natural disasters have increased tenfold from the 1980s to the 2020s (in 2023 dollars).

Disaster losses along coastal areas are likely to escalate in the coming years, in part because of significant increases in building and development.

"Another unfortunate factor proliferating the rising costs of insurance is legal system abuse, which basically entails billboard attorneys swaying Americans toward litigation as a first step, rather than one of last resort," said Kevelighan. "This unfortunate phenomenon is a problem that needs more attention and fixing. For example, one element, which involves third parties funding litigation for profit has virtually zero transparency. Third-party litigation funding has become a multibillion-dollar global asset class of dark money, in which the likes of foreign governments can even invest and profit from the U.S. legal system. Beyond being a potential national security threat, these sovereign funds usually do not pay taxes on these investments," he added.

Even before COVID, homeowners insurers struggled to maintain profitability, as premium rates have not kept up with rising costs. The 2023 net combined ratio of 110.9 marked the industry's worst underwriting results since 2011. In other words, for every dollar taken in, insurers paid out almost $1.11 in claims and expenses last year.

The prospect of the U.S. Federal Reserve lowering interest rates because of inflation moderation holds promise for restoring momentum in new home sales and homeowners insurance growth. While rising interest rates support investment income and create more attractive investment and reinvestment opportunities for insurers, they must be balanced with rates that will slow inflation, stabilize the cost of goods and services, and ease insurers' costs, Triple-I's Issues Brief noted.

"Insurers play a vital role in the economy, protecting against financial losses due to unforeseen events such as natural disasters," said Kevelighan. "However, if insurance companies were to become unprofitable and unable to meet their financial obligations, it leaves policyholders without coverage when they need it most."

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Original text here: https://www.iii.org/press-release/rising-homeowners-insurance-costs-since-pandemic-driven-by-persistent-inflation-replacement-cost-increases-prolonged-supply-chain-issues-and-legal-system-abuse-071624