How does inflation affect insurance? Why is my home insurance going up and up?

Inflation is a general rise in the price level of an economy. It reflects a reduction in the purchasing power per unit of money. Insurance is affected by inflation levels through the property it insures, particularly your home.

Unfortunately, due to inflation these costs are increasing. Building materials for homes are more expensive, there’s a chip shortage driving up the cost of cars, and there’s also a labor shortage. These factors mean the cost to repair your home and vehicle have increased in the event of an insurance claim.

The COVID-19 pandemic has had a devastating impact on our world. In the U.S., industries such as travel, hospitality and auto manufacturing experienced widespread economic challenges. The building industry was also particularly affected.

What is inflation guard?

Many homeowners policies include inflation guard, a provision that adjusts your Coverage A limit each policy term to reflect the gradual increase in the cost to repair or rebuild a home. This is in place to help protect against rising inflation by ensuring you have adequate coverage and your home is insured to value.

  • In multiple states, home insurance costs have increased at more than double the rate of inflation. Over the past 12 months, home insurance premiums are up as much as 18.5% in Arkansas, 18.1% in Washington, and 17.5% in Colorado, increasing by more than twice the rise of inflation during that same period.
  • New York was the only state  with a premium increase lower than the inflation rate, at 8%. Homeowners in New York saw the lowest increases at renewal since last year, with an average premium hike of just $56.
  • Oklahoma saw the largest premium increases, with policyholders seeing their premiums go up $257 on average.

Why are home insurance premiums increasing so much?

Rising inflation

Your home’s dwelling coverage limit is based on the cost to rebuild, including the cost of lumber, roofing, and other raw materials. Ongoing supply chain issues have pushed the price of construction materials up roughly 36% since the start of the pandemic, according to the National Association of Home Builders (NAHB). This has caused both home prices and insurance rates to skyrocket.

How much do homeowners insurance premiums increase each year?

Typically, homeowners insurance premiums increase 2% to 3% each year to cover the cost of inflation. Economic disruption and challenges in the home-building industry have caused inflation factors to increase beyond what annual premium increases consider. As a result, home insurance premiums are going up more than average. These increases are necessary to ensure you have enough coverage to restore your home in the event of a loss.

Here are the challenges facing the insurance industry today that are contributing to increased costs:

1: Filing Claims May Mean Higher Premiums

If you file a claim on your homeowners policy, your rates may increase. When something happens, you may ask yourself, “How much will my homeowners insurance increase if I file a claim?” Given that claims range from the small (think replacing a broken window) to the large (think reconstructing your kitchen after a fire), it can depend on the total cost of the claim.

And if you’re thinking about filing a small claim — that may not cost you much more than your deductible — it could be smart just to pay it out-of-pocket. Remember, you can always talk to your agent with any questions. They’re a resource you can trust to help you assess whether the type of claim you’re considering is worth filing.

2: Property Changes & Attractive Nuisances

When you put an addition on your home, you’re right to expect that its value will increase as a result. One factor in building a homeowners quote is your home’s square footage. And when property changes occur that boost your property value, you may see a homeowners insurance increase.

If you’ve made big investments into home improvement and updated your kitchen, it’s going to cost more to replace those expensive new items — per square foot — compared to what you had in the kitchen before. That’s one of the reasons why you’ll see a rate increase, but it doesn’t mean that you’ll find homeowners insurance increases every year.

When your property has a swimming pool or a trampoline, insurance companies consider these “attractive nuisances” that can pose a higher risk than homes without these items. Even backyard play sets can fall into this category. When attractive nuisances are added to your property, you may find a rate increase as a result. That’s because if someone injures themselves in the pool or on the swing set, you could be held liable. But if you’ve taken steps to prevent accidents like installing a fence around a pool, that may help reduce the rate increase.

3: Inflation Strikes Again

As inflation increases, insurance companies respond by raising rates. That’s because the cost of items in your home will cost more than they did last year. As the price for appliances and equipment escalates, rates will adjust as well. The insurance industry references the Consumer Price Index to measure inflation and adjusts rates accordingly. It’s one big reason why property owners find that their home insurance keeps going up year after year, even if nothing’s changed on their property.

4: Construction Costs in Your Area Affect Your Rebuild Cost

There are many reasons that your cost to rebuild could increase:

  • Adding square footage to a home
  • Significantly altering the floor plan of a home
  • Renovations to home systems
  • Remodels of kitchens and baths
  • Finishing basements or attics
  • Adding decks, patios or porches
  • Upgrading interior/exterior finishes

5: Your Insurance Score Dropped

A key component used to develop your total premium, your insurance score is a lot like your credit score — but for insurance purposes. It’s a calculation based on your likelihood of filing a claim during a given coverage period. And your credit history is actually part of that calculation. Databases that hold details on previous property claims are used to factor your premium. These are some of the same factors that go into building your auto insurance score, as well.

If you improve your credit score, you can help to minimize annual home insurance price increase

6: The COVID-19 pandemic has had a devastating impact on our world. In the U.S., industries such as travel, hospitality and auto manufacturing experienced widespread economic challenges. The building industry was also particularly affected.  

Does inflation affect my home insurance premium?

Yes, inflation has an impact on your insurance premium, due to the impact on replacement cost. In a typical year, insurance companies account for about a 2% to 3% increase to address standard inflation. This year, economic disruption and challenges in the home-building industry are impacting supply and demand and resulting in much higher inflation factors, and subsequently affecting insurance premiums. Many homeowners will see larger increases as a result.

How to save on your auto insurance:

  • Check for any auto insurance discounts you may qualify for
  • Maintain a good driving record or participate in a safe driving program like RightTrack
  • Explore payment options like automatic payments or paying for the year in full
  • Increase your deductible
  • Bundle with your home insurance and save

Is the economic slowdown due to the COVID-19 pandemic increasing home insurance costs?

These days, it seems the pandemic is having an impact on everything. While the pandemic is impacting the economy, it’s the economic impacts on the building industry and resulting supply and demand imbalances contributing to inflation driving home insurance premiums up.

The current rate of inflation requires that we increase Coverage A values to guard against underinsurance. Because of this, many will see a higher-than-normal increase in their homeowners premium. This coverage increase will help you assure that, in the event of a loss, the limits on your policy more adequately reflect the expected costs to repair or rebuild your home.

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Are you ready to save time, aggravation, and money? The team at Peak Insurance Group is here and ready to make the process as painless as possible. We look forward to meeting you!

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