Home Insurers Are Charging More and Insuring Less

by Jean Eaglesham | July 30, 2023 

Double-digit premium hikes. Higher deductibles. New coverage limits. Drones to check the state of roofs and yards.

Home insurers are insuring less and charging more as they try to claw their way back to profitability after losing money in five of the past six years, analysts and insurance agents say. 

“We’re seeing moves to put more of the risk back onto the homeowner, tougher underwriting restrictions and big rate increases,” said Lauren Menuey, a managing director at independent agency Goosehead Insurance. 

The higher-cost, lower-coverage trend extends well beyond Florida, California and other states prone to hurricanes, floods or wildfires, Menuey added. “I don’t think anywhere is safe from this right now,” she said. 

Losses for home-insurance companies continued to pile up in the first six months of this year. Storms, natural disasters, inflation and supply-chain snafus have sent claims spiraling, leaving many insurers still in the red despite sharp increases to premiums. 

“The results are awful and not sustainable,” said Paul Newsome, an analyst at Piper Sandler. 

Since the start of the last year, double-digit rate increases have been approved in 31 states, according to an analysis by S&P Global Market Intelligence for The Wall Street Journal. Arizona, Texas, North Carolina, Oregon, Illinois and Utah had the biggest total of approved increases, ranging from 20% to 30%. In states such as California, some insurers are halting sales of new policies. 

Home-insurance rate increases approved since January 2022

Note: As of July 5
Source: S&P Global Market Intelligence
Kara Dapena/THE WALL STREET JOURNAL

Travelers, a big home insurer, said last week that a 19% increase in premiums was just one prong of its “profit improvement” effort. 

“Beyond that, we’re managing terms and conditions,” Michael Klein, head of Travelers personal insurance, said on a call with investors. “Think deductibles, think roof age eligibility, think coverage levels on roof replacement.” 

Tim Zawacki, an S&P analyst, said companies are “tightening the screws around the edges on coverage to limit their expenses.” Some insurers, he said, are limiting coverage for older roofs to their cash value, rather than their replacement cost. 

Many insurers have cut coverage of wind and hail damage by increasing the deductible—or the first part of the claim that the policyholder has to pay—from 1% to 2% or more, Goosehead’s Menuey said.

Companies are also pulling back from some areas vulnerable to disasters. Many big insurers have exited Florida and Louisiana, both of which have suffered tens of billions of dollars in losses from hurricanes in recent years. In wildfire-prone California, where State Farm and Allstate have stopped writing new home policies, the industry says regulatory curbs on pricing mean they cannot charge enough to cover their costs. California’s insurance regulator says insurers have failed to ask for adequate rate increases. 

In Florida, alongside coverage restrictions and higher premiums, there is a “reluctance from insurers to write policies for older homes or homes that don’t have strong wind mitigation,” according to Miami-based Fred Zutel of brokerage Lockton.

Now, he added, “we’re seeing similar, albeit not quite as punitive, restrictions from insurers in other low-lying coastal areas, such as Louisiana, Texas, the Carolinas.”

Higher premiums hit consumers already burdened with higher interest rates and inflation. There is little chance the home-insurance pain will ease in the short term for either companies or policyholders, industry insiders and analysts say.

Severe-weather events and insurance-industry losses for first half of the year, 2010–23

Note: Losses are inflation-adjusted.

Source: BMS Re
Kara Dapena/THE WALL STREET JOURNAL

“We’re still seeing the industry having an underwriting loss this year continuing out to 2025,” said Dale Porfilio, chief insurance officer at industry body the Insurance Information Institute. The institute expects that “the cycle of continuing to take rates upward is going to continue for the next two years,” Porfilio said.

One positive development is a slowdown in the increase in repair and replacement costs that helped push up the dollar value of claims. Total reconstruction costs, including labor and materials, are up 1.6% so far this year, compared with rises of more than 7% in each of the past three calendar years, according to insurance analytics firm Verisk. 

Weather damage appears to be getting worse, though. Companies are reporting significant home-insurance losses from a series of recent severe storms across the Midwest. Progressive, for example, said catastrophe losses last month ate up 92% of home-insurance premiums earned. The company blamed severe weather throughout the U.S.

Insured damage in the U.S. from severe storms, wildfires, floods and other natural disasters has topped $90 billion in each of the past three years, according to insurance broker Aon. That is markedly higher than the inflation-adjusted averages for any of the previous four decades, including $54 billion for the 2010s and $40 billion for the 2000s, the Aon data show.

Insurers “expect catastrophe losses to remain elevated for all the climate-risk reasons we and scientists and everybody else has talked about,” the Insurance Information Institute’s Porfilio said. Global warming is increasing the frequency of some types of natural disasters, while population shifts into vulnerable areas are adding to the underlying costs, scientists and brokers say. 

This summer’s heat wave has warmed the water around the Gulf Coast, heightening the risk of hurricanes, as well as adding to the fuel for potential California wildfires, according to Rod Fox, executive chairman of reinsurance broker Howden Tiger. 

The escalating cost of catastrophes is reflected in a steep increase in premiums for the reinsurance coverage that home-insurance companies buy to pass on some of their risk. Depending on the state regulator, those higher premiums can feed directly through to the price charged to homeowners, Fox said. His firm’s data shows reinsurance premiums were up on average 33% for June 1 renewals, which includes many Florida carriers, and 50% for renewals at the start of this year. 

The question of whether reinsurance prices will keep rising, piling more pressure on home-insurance premiums, depends a lot on what happens in the second half of this year, according to Fox. “There’s a fork in the road ahead,” he said. “If we have another major hurricane or some medium-size hurricanes or a spate of wildfires…that [reinsurance] price will go up again.”

Source: wsj.com