Since 2000, home insurance prices have risen nearly four times faster than median family income. Surprisingly, home insurance prices have even risen 21 percent faster than the personal contribution to health care over this same period of time.
Two primary reasons are cited as to why the industry is raising prices so rapidly. One, the frequency of large storms is increasing. Two, the cost of covering the insured damage from these storms is also rising.
What is less well-known is the proverbial “rest of the story.” The rest of the story is how these rapid increases in insurance prices have hurt consumers and benefited the industry.
The Negative Impact of Higher Home Insurance Prices on Consumers
For homeowners, the average price of home insurance in 2000 was $508. By 2015 that average price had increased to $1,169. That was an increase of $661, or 130 percent. The increased cost of $661 for home insurance translates directly into a reduced amount of mortgage payment for which consumers qualify. In comparison to median family income, which was $41,990 in 2000 and by 2015 had increased to $56,516, this was an increase of only 34 percent.
While mortgage rates were dropping at historic lows for much of the millennium, home affordability improved. During this period of dropping mortgage rates, the rise in home insurance rates went unnoticed.
Now it’s a different situation—home mortgage rates are beginning to rise. Adding this on top of the surprisingly fast rise and continuing increase in insurance prices, home insurance is directly affecting the affordability of homes.
The Positive Impact of Higher Home Insurance Prices for Insurers
Home insurance loss ratios vary dramatically based on catastrophic events such as hurricanes, fires, or hailstorms. To minimize the effect of catastrophic, short-term events, ValChoice, a website that provides free reports on auto and homeowners insurance, uses a linear trend line to show the changing loss ratio over the 15-year term of this study. With this approach, ValChoice gets a clear picture of the value home insurance is providing homeowners.
The result of this analysis is that during the time frame of 2000 to 2015, the reduction in the percentage of premiums policyholders paid to their insurers that were returned to the insured in the form of a claim payment was reduced by 19.5 percent. In 2015, this amounted to nearly $21 billion of incremental profits for insurance companies as compared to 2000.
What Consumers Can Do About This Problem
Whether home, car, or health insurance, prices consumers are paying are increasing dramatically. This increase is both in terms of real dollars and as a percentage of the family income. Consumers need analytics that calculate both the value of the insurance they buy and the protection it offers. Historically, this type of data has not been available. Finally, there are technology companies collecting and analyzing data on the insurance industry so consumers can make better decisions about the insurance they buy.
Regulators, lawmakers, and the best insurance companies need to embrace transparency. Only through transparency will consumers have the information they deserve when spending large sums of money on insurance.