If you own a home, you may have noticed a recent increase in your insurance premium. Why is this? In the past, annual homeowners insurance premiums increased minimally or not at all. But in the past 12 months, we’ve seen increases of $100 or more, on average, in nearly every part of the country.
Reminder: An insurance premium is just a fancy way of saying the amount you pay in exchange for protection from loss, hazard or harm.
In this post, we’ll help you understand why premiums are rising, and why a yearly review of your coverage with an independent agent is critical. Insurance is complicated, especially in complex economic times. A trusted adviser, like a Chalmers agent, can help you understand current market conditions with your best interests in mind.
Let’s begin with a quick overview.
The insurance market is characterized by cycles. It fluctuates between soft market conditions and hard market conditions. Soft markets tend to be good for customers because premiums hold steady or decrease. During a hard market, which we currently find ourselves in, insurance rates increase and coverage is more difficult to obtain.
What causes a hard market?
A hard market is characterized by a high demand for insurance coverage, and therefore a reduced supply. Payouts from insurance companies to customers may have increased and in response, insurance companies are less inclined to take on new business for fear they will not be able to deliver on additional payouts. The criteria to obtain insurance are stricter, and therefore premiums are more expensive.
In addition to higher insurance premiums, a hard market means more stringent underwriting criteria, especially in areas prone to catastrophic weather events. This means that insurance carriers offer less coverage overall and that leads to reduced competition between carriers.
In contrast, in a soft market, there is more competition between carriers. Premiums are stable, if not falling. And it’s fairly easy to get coverage for all kinds of risk. As a buyer, you have more options from which to choose and underwriting rules are less stringent.
To complicate matters, a less obvious but important factor in our current hard market, is the housing market. When home values are at record highs, customers need to carry more insurance to cover their dwelling in the event of a major event.
Let’s look at an example to help illustrate this relationship.
Imagine that your house burned down, and you needed to rebuild your home. The cost to rebuild your home has probably gone up by 20 or 25 percent in the last year. This increase is caused by inflation on the goods needed to build the house, as well as general labor shortages in the industry. Put simply, your home would cost a lot more to replace, which in turn, increases your premium.
But wait, doesn’t my insurance company automatically adjust my coverage every year to account for inflation?
Yes, if you have an “inflation guard” endorsement on your policy, your home insurance company automatically adjusts your coverage amount at each renewal time to try to keep up with rising costs. Typical inflation adjustments are usually 2% to 4% annually. But as costs rise, many agents are finding that the inflation guard is not enough.
To summarize, your homeowners insurance, whether it comes with an inflation guard endorsement or not, needs to change with the times. As a client of Chalmers, you have several options to protect against hard market conditions including extended and guaranteed replacement cost insurance.
Did you know? Extended replacement coverage will add a certain percentage more to your dwelling coverage if the amount stated in your policy turns out to be insufficient. For example, it might provide up to 25 percent more dwelling coverage. Guaranteed replacement cost will pay any cost to rebuild your house, with no cap.
Not all insurers offer extended or guaranteed replacement cost, but it’s wise to reach out to Chalmers to review your coverage options.
In summary, navigating the complexities of the hard insurance market isn’t something you need to do on your own; that’s why we’re here. We understand that premium increases are not fun. But we can offer explanations, explain your risks, as well as offer cost mitigation strategies. We’re here to educate you and help you protect the things that matter most.
We look forward to hearing from you.