Homeowners Insurance Cost Rising Faster Than Inflation

Supply chain issues, construction costs, and natural disasters fuel increases

Young couple and their real estate agent looking at housing plan on touchpad in the office
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If you own your home, be prepared to pay more to insure it: Homeowners insurance premiums are rising along with prices almost everywhere else in the economy.

Key Takeaways

  • The cost to insure your home has been rising faster than inflation and is expected to continue increasing as long as pandemic-era disruptions keep pushing up prices.
  • Because homeowners insurance takes into account the cost of rebuilding your house, premiums are being boosted by many of the things—like supply chain and labor shortage issues—that are contributing to higher costs elsewhere in the economy.
  • Increases in the frequency and severity of natural disasters are also contributing.

The cost of homeowners insurance, like food and gasoline, rose last year and doesn’t look to be easing up anytime soon. The nationwide average annual premium increased to $1,398 in 2021, up 4% from 2020, according to the Insurance Information Institute, a trade group. The 2020 inflation rate was about 1.2%, data from the Bureau of Labor Statistics showed.

In fourth-quarter 2021, the average insurance rate increased 3.7% from the same period in 2020 for homes worth under $1 million, but 6.3% for those above that threshold, according to MarketScout, which tracks insurance rates. That compares to an average forecast of 4.6% for consumer inflation in last year’s final quarter, according to a November report from the Federal Reserve Bank of Philadelphia.

From 2017 to 2020, average homeowners premium rates increased a total of 11.4% on average—outpacing the 7.3% inflation rate over that same period. 

Many of the pandemic-era supply issues that are pushing up other prices are also boosting the cost of insurance on homes. So if supply chain and labor shortage problems resulting from the pandemic don’t sort themselves out soon, look for your homeowners insurance premiums to continue their upward march.

“There is a lot that goes into pricing homeowners insurance,” said Michael Barry, chief communications officer at the insurance institute. “One of the things home insurers look at is what it would cost to rebuild your home in the event of loss.”

As a result, the rising price of nearly everything related to home construction—lumber, steel, concrete, and architects and contractors—has contributed to the increase in homeowners insurance premiums. The National Association of Home Builders said that wholesale prices for “all inputs” related to residential construction climbed 17.3% in November over the previous 12 months, and were 22.7% higher than the pre-pandemic level, based on data from the latest Producer Price Index report released by the Bureau of Labor Statistics.

Another factor in the premium hikes, Barry said, is an increasing number of natural disasters that have cost billions of dollars in losses. As of Oct. 8, the U.S. had experienced 18 weather/climate disaster events with losses exceeding $1 billion each in 2021, according to the National Centers for Environmental Information. The 1980-2020 annual average was 7.1 for such events (adjusted for inflation), the centers said.

“Climate risk and the increasing frequency and severity of the disasters are something insurers have priced into policies,” Barry said. “Depending on what state you live in, rates can be affected, too. Rates are also based on actual and anticipated losses in each state.” 

In disaster areas like near the California wildfires, some homeowners insurance rates could double this year, said Richard Kerr, CEO of MarketScout. “That’s the really big story,” he said. “Those people are getting crushed.”

Reining in Costs

While consumers can’t do much to control inflation or natural disasters, there are some specific actions they can take to try to soften the blow of rising premiums, Barry said. Among them: 

  • Raise your deductible
  • Bundle your auto and homeowners policies with one insurer to get a discount
  • Invest in loss-mitigation tactics if you live in a disaster-prone area.

“You might have to do a cost-benefit analysis. But if you’re in a hurricane-prone state, you might want to look into shutters and wind-resistant windows,” Barry said. “That investment could result in some discounts that can save you some money.”

Have a question, comment, or story to share? You can reach Medora at medoralee@thebalance.com.

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