Homeowners insurance premiums rising amid mounting weather-related losses, inflation: report

Homeowners insurance premiums have surged in recent years due to a rise in claims caused by severe weather in states with growing populations, according to a new report by Moody's.

Homeowners are feeling the financial sting of higher insurance premiums as firms offering homeowners insurance policies look to mitigate mounting losses from weather-related incidents and inflation that have cut into profits, according to a new report by Moody's.

The report found homeowners insurers have, on average, paid out more in claims than they've received in premiums, with the so-called combined ratio reaching 101.3% over the last decade and topping 100% each year since 2020. To preserve profitability amid mounting costs, insurers have increased premiums charged to homeowners.

"In the last five years (2019 to early 2024), most of the country has seen double-digit rate increases," Evelyn Ocas Salazar, AVP-analyst for the Financial Institutions Group at Moody's Ratings, told FOX Business. "In 2023, 80% of the country saw double-digit rate increases of up to 30%, with the higher end of the scale in areas more prone to weather-related risk."

Much of the rise in payouts has been attributed to damaging storms and the rising cost of materials needed to repair and rebuild damaged properties. 

SURGE IN HOME INSURANCE COSTS ADDING MORE INFLATION PRESSURE ON AMERICANS

In 2023, property and casualty insurers reported $58 billion in losses due to severe storms, which Moody's noted surpassed both the 10-year average and the prior record set in 2020. That came a year after Hurricane Ian caused an estimated $52.5 billion in insured losses, according to Aon. 

Inflationary pressures in construction and labor costs have risen in recent years, contributing to the dilemma facing insurers and homeowners.

Average hourly earnings have risen by over 20% since 2018. Construction materials costs surged in 2021 after largely tracking labor costs and have remained above 40% in the producer price index relative to 2018.

US HOME PRICES HAVE SURGED 47% SINCE THE START OF 2020

Part of the reason for higher homeowners insurance payouts in areas prone to disasters is the population in most of those areas has risen in recent years, resulting in more homes to insure. 

Moody's noted that although California's population declined from 39.4 million to 39 million from 2019 to 2023, Texas saw its population grow from 28.9 million to 30.5 million in that period, while Florida's grew from 21.5 million to 22.6 million. Population changes were minimal in other states, including Colorado, Louisiana and Oklahoma. 

PERCENTAGE OF US MORTGAGES CONSIDERED 'SERIOUSLY UNDERWATER' RISES

The report also notes that "changes in claims settlement practices and litigation are driving up claims costs." Most homeowners insurance policies are renewed annually and may be subject to regulatory approval for rate increases, which creates a lag between increases in claims costs and insurers having an opportunity to adjust their pricing.

Some insurance firms have limited their operations or stopped offering homeowners insurance policies in disaster-prone areas as a means of stemming losses, though that creates more difficulties for homeowners looking to protect their homes from catastrophe.

"There's been some pullback in capacity," Salazar said. "Companies are limiting their growth or exiting certain areas where they cannot meet their targeted returns. This is notably the case in California, where the rate process is far more challenging. Major players in the state pulled back capacity or limited new business to rebalance their exposure."

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Other insurers have shifted their business to the excess and surplus market, where they have more flexibility to set rates based on the unique risks facing policyholders.