Just like almost everything else, the cost of homeowners insurance is rising.
Homeowners who purchased residential and vacation homes in natural disaster prone areas are really going to feel a pinch on their wallets.
Approximately 45% of pandemic homebuyers purchased vacation and second homes in high flood risk zones, according to a Redfin report. Although homeowners insurance is required by mortgage lenders, flood insurance is separate coverage.
For homeowners that purchased in heat and drought areas prone to wildfires, increased coverage may be necessary — assuming you can find an insurer as some are pulling out of markets with increased natural disaster risks.
Premiums are up between 3% and 30%, according to S&P Global Market Intelligence, with Texas homeowners seeing the biggest hike. Since 2018, the average annual premium for homeowners insurance has increased by nearly 12% from $1,249 to $1,398 in 2021, according to the Insurance Information Institute (TripIe- I).
Inflation, bad weather, and supply chain issues are behind the rise in rates.
“As inflation increases, the cost of repairing or rebuilding a home does as well,” Ben Potter, homeowners product line leader at USAA, told Yahoo Finance. “When you add supply shortages, this may result in insureds being dislocated from their homes longer, which means higher payments for temporary living expenses. When the total expense of replacing or repairing your home from an insured loss goes up, it’s likely that your premiums will go up as well.”
The cost to rebuild a home is one of the major factors that determine the premium for homeowners insurance, according to Robert Lajdziak, director of Insurance Intelligence at J.D. Power, and the cost of materials and labor is going up.
“Inflation is the killer,” Lajdziak told Yahoo Money. “Carriers have to adjust for that, which means premiums go up.”
Insurance companies replace items based on actual cash value (ACV) or replacement cost value (RCV). Because actual cash value considers the depreciated value of an item, replacement cost value is preferred, but some carriers charge more for it.
And in the last year, home replacement costs increased 13.6% — nearly doubling the U.S. inflation rate — with supply chain disruption and increasing labor costs as the primary drivers, according to Mark Friedlander, director of corporate communications at the Insurance Information Institute.
Damage from an inch flood water can cause $25,000 in damage alone and 30% of all flood damage claims come from low risk zones — where flood insurance is not required, according to FEMA.
“Recent natural disasters such as Hurricane Ida, the December Midwest tornado outbreak, and Marshall Fire in Colorado showed that many homeowners were underinsured,” Friedlander told Yahoo Finance, “and did not have a high enough level of dwelling coverage in their insurance policy to fully replace their home.”
In December, weather-related losses exceeded the expected $105 billion due to unseasonal tornadoes in both the Midwest and South, according to TransUnion’s latest Personal Lines Insurance Shopping Report, which noted that higher premiums is likely the result.
As changing weather patterns cause more destructive storms more frequently, homeowners along the coast and in areas prone to wildfires, tornadoes, flooding, and hurricanes will see higher prices or even insurers canceling policies.
“We have seen some actions in disaster-prone states where insurers have decided to either stop writing new business in certain locations or are reducing their risk by non-renewing some properties,” Friedlander said.
For instance, North Carolina homeowners can expect a 7.9% increase in homeowners insurance beginning in June due to windstorm, hail, and flood damage caused by hurricanes.
And last year, the California Insurance Commissioner issued a one-year moratorium to protect homeowners affected by recent wildfires from having their policies canceled or non-renewed.
“I have witnessed high-value home coverage pull back in markets with higher than usual wildfire activity,” Marty Ellingsworth, executive managing director at J.D. Power, told Yahoo Finance. “A while ago, some carriers made similar choices about hurricanes and even rising sea level risks. When the region of risk is wide, some carriers step out of the market.”
Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda