Homeowners Insurance Expects 8 Percent Jump in 2004

Rapidly rising construction costs prices, home remodeling and increasingly expensive natural disasters are expected to push the cost of homeowners insurance up by eight percent in 2004, according to a report by the Insurance Information Institute (I.I.I.) The projected increase represents a modest change from the estimated seven percent increase in 2003, noted the I.I.I. The average cost for home insurance nationwide for 2004 is projected to be $615—an increase of $46 for the average homeowner over this year. “Part of the increase reflects choices more homeowners are making,” Robert Hartwig, senior vice president and economist for the I.I.I., said. “People are taking advantage of record low interest rates and are moving into new homes or making additions to their existing homes in near record numbers. These upgrades and additions are pushing up insurance costs. People expect their premium rates to stay the same, but they don’t realize they have more house to insure.” Rapidly rising home prices are a prime factor in rising homeowners insurance costs. Since 1995, the median price of an existing home has risen by nearly $60,000. New home prices are rising at a significant pace. The boom in mortgage refinancing is also contributing to higher insurance costs as homeowners use their savings to tap into home equity lines of credit to build additions, remodel and update their homes, adding to their value. According to a research report issued in February by Harvard’s Joint Center for Housing Studies, http://www.nari.org/inner-space.cfm, home improvement “has become the great national pastime.” In 2001, the most recent year for which annual figures were available, an estimated $214 billion was spent on home improvements, maintenance and repairs (including by owners of rental properties). According to the I.I.I., between 1990 and 2002, home insurers paid out, on average, $1.167 in losses and expenses for every $1 they earned in premiums. In 2002 alone, home insurers paid out $4.7 billion more in losses and expenses than they received in premiums. In 2001, home insurers lost $7.43 billion, the second worst year on record (the highest is 1992, which included Hurricane Andrew, produced losses of $11.5 billion). Losses in the homeowners insurance line over the past four years (2000 through 2003) are estimated at $187 billion, approaching the level of insured property losses from the Sept. 11 terrorist attack. Also during the 1990s, the severity of catastrophes began to increase dramatically. Since 1990, insurers have reportedly paid out more than $100 billion in catastrophe-related losses—or about $700 million per month. “Homeowners insurance rates in many parts of the country continue to rise because of the extraordinary costs associated with paying these claims,” Hartwig said. “In fact, virtually every part of the country is either at risk of or has experienced a billion dollar disasters.” Another issue, mold in homes, is not new. However, increased public anxiety stemming from publicity surrounding high profile lawsuits in Texas and California has increased the risk associated with water damage across the country. “There is no new ‘killer mold’ out there,” Hartwig continued. “But the sharp rise in mold claims is definitely a 21st century phenomenon. Unfortunately, so are multi-million dollar jury awards associated with mold,” he said. “No one wants to see the virtual collapse of the insurance market in Texas happen anywhere else, so steps are being taken to limit coverage and contain mold costs. But we are still in a situation where any water damage claim anywhere in the country can produce a million dollar lawsuit. Insurers have to factor that into the cost of insurance.”

Topics Homeowners