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Homeowners Insurance: Premiums and Cancellations Are Rising

It seems like everywhere you turn, prices look like a hockey stick: up and to the right. 

This includes homeowners insurance premiums, which have risen significantly since the pandemic, according to the Insurance Information Institute. Its analysis shows that from 2017 to 2021, homeowner insurance premiums are up an average of 12.2% nationwide. Although the rise in premiums has been significant in the past couple of years, the upward trend predates the pandemic.

In addition to premiums going up, some homeowners are even receiving nonrenewal notices from their insurers.

The reasons behind rising premiums and nonrenewal notices are complex, but they relate to broad changes in underlying risk—and how those rising risks affect the financial health of insurance companies. 

There are three big, interrelated reasons risks have changed: 

  1. The frequency and size of natural disaster losses are increasing.
  2. The costs of building a home are going up.
  3. Low housing inventory is causing home prices to rise dramatically.

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1. Natural Disasters Are Increasing

Damage from natural disasters is a leading cause of premium increases. Hurricanes, tornadoes, tropical storms, and wildfires are increasing in frequency and severity—and losses are skyrocketing. 

Another factor that exacerbates these losses is an ongoing population shift to areas of the country that are susceptible to these catastrophic events.

When people relocate to coastal areas in the South or Southwest corner of the country, they are moving to the regions where hurricanes are likely to hit and wildfires are becoming increasingly common. 

Whether it is people moving for work or businesses relocating to where there is a labor force, fast growth means more people and more buildings and infrastructure. When a natural disaster hits, the losses can be staggering.

2. Replacement Costs Are Going Up

Inflationary pressures and ongoing supply-chain issues also are contributing to insurance premium increases. 

Most homes are insured at replacement cost, rather than their actual cash value. In fact, some insurers don’t even offer actual cash value as an option. This is because when homeowners experience a total loss due to a covered event, they usually want to rebuild their home fairly close to what they had before.

A structure’s actual cash value is based on the depreciated value of the property, taking into account age, wear, and tear. Replacement cost coverage reimburses you at the rate things cost now. When put that way, it’s easy to understand why premiums are increasing.

Whether it’s the lumber that will be used to rebuild a home or the appliances that will fill it, all of the components that go into construction have gone up in price. Rebuilding a house that is lost in a fire will cost substantially more now than it would have even a few years ago.

3. Housing Prices Are Rising

Another factor is the ballooning demand for housing. There are lots of variables at play here, beyond the reduced availability of building materials covered above. 

Sometimes land scarcity is a factor, or perhaps there’s a shortage of existing houses that leaves buyers with little to choose from when they are looking for a home. Location is an important factor in determining home insurance rates, and it is affecting a rise in premiums.

Labor is also in short supply. Almost every trade associated with building a home is experiencing shortages, from framing to drywall hanging to plumbing and painting. This impacts on the cost of building a home in a couple of ways. First, salaries go up—yet another factor that increases the cost of a new home. Second, shortages slow the pace of construction. This puts additional pressure on the supply side of the equation. There simply aren’t enough workers in some areas of the country to keep up with the demand for homes.

Nonrenewal Notices

There are a number of reasons that an insurance company might not renew your homeowners insurance policy, but most point back to an increase in risk. Here are just some of the ways your risk profile could change that could potentially result in a nonrenewal:

  • Nonpayment
  • Too many claims within a short amount of time
  • Discovery that the homeowner provided false information when applying for insurance
  • Deferred home maintenance leading to unsafe conditions
  • Dog bites or other animal hazards
  • A sudden and substantial drop in the policy holder’s credit score
  • Change in occupancy (leaving the house vacant for extended time periods, for example)
  • Adding a pool or trampoline (or other changes in risk)

There are also reasons that you might receive a nonrenewal notice that have nothing to do with you, including a decision by your insurance company not to operate in your state any longer. This is what happened to homeowners in several states, as insurance companies decided to pull out of specific markets due to increased weather-related risks.

In Florida, large losses stemming from hurricanes led some companies to withdraw from that market, while some in California determined that increased periods of drought—leading to longer and more devastating wildfire seasons—meant too much risk.

What to Do If Your Policies Are Not Renewed

It can be very stressful to receive a homeowners insurance cancellation letter. 

What you need to do if you do receive one will depend on the reason your insurance company will no longer offer coverage. If the company is pulling out of the market you live in, there’s not much you could do other than to start looking for another carrier.

If it’s for another reason, such as installing a pool, talk to your insurance company to see if there are any steps you can take to improve safety and reduce risk. You can typically appeal a nonrenewal decision, but don’t rely on the decision being overturned; in case the decision is not overturned, it may be best to start looking for an alternative provider as soon as possible.

Insurance companies have different underwriting rules, so a nonrenewal by one carrier doesn’t necessarily mean you’ll be denied coverage by another—but again, the reasons matter. If you provided false or inaccurate information on your application and you lose your insurance, that dishonesty could count against you when you try to get coverage from another company.

If you live in a state or region that has high catastrophic risks, such as a coastal area, you can take some steps that might reduce your chances of getting a nonrenewal notice. Updating your home to make it more resistant to the risks you face in your area is one option. 

Pay attention to other risk factors, too: If there’s an uptick in crime in the area, add an alarm system. Enroll your dog in a Canine Good Citizen class. The more you can do to reduce the risks that your carrier is concerned about, the less likely you are to receive a nonrenewal letter.

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The Bottom Line

Costs are increasing for everyone, and that includes home insurance carriers. 

Premiums are rising because the costs to rebuild a home have skyrocketed. Frequent and costly natural disasters are another problem, and these threats are growing fast. With more people comes more building, and the potential losses increase.

All of this upheaval is causing companies to reassess and tighten their tolerance for risk, resulting in more nonrenewal notices. If you do receive a nonrenewal notice, try to make your case for your insurer to keep you on—if that’s an option. If the carrier is pulling out of the market entirely, start looking for another insurance company right away.

Quick note: When insurance rates increase, it’s always a good time to compare quotes to see how much you could save on your insurance*. Guaranteed Rate Insurance offers an online quoting platform for Home Insurance where you can start your quote and compare rates, then speak with a licensed agent to complete your policy. With access to over 40 different home insurance carriers via insurance agents across all 50 states, you may find a better rate.  

Disclaimer: 

*Savings, if any, vary based on the consumer’s profile and other factors. Contact your insurance agent for more information. Restrictions apply.

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