Homeowners insurance costs are growing fast but coverage is shrinking

A long-time client phoned Dave Davis one morning in July to say that he would be buying homeowners insurance from another agency.

Davis, an insurance agent in Rapid City, South Dakota, said their professional relationship went back 20 years, so it was a big deal to him. “He said, ‘I want you to know because you’ve taken care of me all these years: I had to switch. My homeowners went up $2,000. I had to switch.’”

All over the country, the cost of homeowners insurance has increased rapidly. A recent report from S&P Global found that average premiums increased by 34 percent nationwide over a seven-year period. But in some Ninth District states, premiums increased even faster, with South Dakota premiums growing by 41 percent. Over the same period, inflation grew by 24 percent.

At the same time, what homeowners receive for their premiums has decreased, as insurers impose new conditions on coverage of common perils such as wind and hail damage.

Insurance experts say the main reason premiums are going up is that insurers are under financial stress. For several years, premiums in many states have not kept up with the payouts for damaged property. Catastrophes are a key driver. In Florida, it’s hurricanes. In California, Montana, and many Western states, it’s wildfires. In the Upper Midwest, it’s wind and hailstorms. All of which are exacerbated by the inflation of construction costs.

The financial stress has spread to homeowners as well. Besides protecting an important investment, homeowners insurance is also often required for those with mortgages.

Shannon Martin, an insurance agent and analyst with Bankrate, said the affordability of homeownership is a concern as catastrophes become more common. “What’s happening to the people who already have homes and they’re 15 years into a 30-year mortgage, and now their insurance is completely unaffordable?”

Where premiums go up the fastest

The states with the most rapid increases in premiums since 2017 are mostly west of the Mississippi in areas prone to tornadoes, hail, or wildfire. In the Ninth District, that describes South Dakota, Minnesota, and Montana, all of which have seen premiums increase faster than the national average (Figure 1).

How premiums are calculated differs depending on the insurance company and are usually proprietary information. But experts say that insurers generally try to keep rates low enough to remain competitive but high enough to avoid risk of insolvency. “Insolvency” means an insurer cannot pay what it owes, including payouts to policyholders with property damage.

Many insurance regulators are keenly aware of this balancing act.

In Minnesota, for example, requests for premium increases filed by insurers are reviewed by actuaries at the Department of Commerce to ensure they’re not too high and not too low. Average homeowners insurance premiums have increased by 39 percent over the past seven years, and 15 percent in 2023 alone. But Julia Dreier, the state’s deputy commissioner for insurance, said it’s justified.

“These increases make sense to us,” she said. “A lot of the companies have been operating at a loss for a considerable period of time. Typically, what we had seen in an insurance market is you’d expect some years of loss but some years where they’re not losing as much money. And we’ve just seen five-plus years of sustained losses.”

Insurance companies usually can withstand losses over a few years by relying on profits from other lines of business, such as auto insurance or their investments. But several years of back-to-back losses would force premiums up.

One way to measure the health of the homeowners insurance industry is by comparing premiums earned by insurers against expenses, the biggest of which are typically payouts to policyholders with damaged homes.

The National Association of Insurance Commissioners (NAIC), which compiles statistics for regulators, calls this “underwriting profit and loss.” The group’s data shows insurers throughout the U.S. experiencing losses in four of the five years from 2018 to 2022. That was the case in Minnesota and South Dakota, too. In Montana, it was three of the five years. The few years of profit means insurers have been unable to make up for losses from other years (Figure 2).

NAIC data for 2023 isn’t yet available, but Tim Zawacki, an analyst with S&P Global, said the year was “terrible” for homeowners insurers because of several catastrophic storms.

Catastrophic damage from severe storms

Industry experts cite several reasons for losses, from increasing damage caused by weather-related catastrophes to lower investment yields, to inflation-driven construction costs.

The main driver, however, is the catastrophes. Wind and hailstorms, common in the Upper Midwest, are second only to hurricanes in the damage they inflict. Among disasters that cause at least $1 billion in damages, severe storms — which include hailstorms, straight-line wind, and tornadoes — caused $246 billion in damage to U.S. properties from 2014 to 2023, according to the National Centers for Environmental Information (NCEI). Tropical cyclones, such as hurricanes, caused $692 billion in damage.

2023 was notable for damage from severe storms, which exceeded all other years since 1980, when record-keeping began. Nearly half of the 19 “billion-dollar” storms in the U.S. that year happened in Ninth District states.

In district states prone to severe storms, like South Dakota and Minnesota, the per capita cost of billion-dollar disasters is significant (Figure 3). In Montana, damage from severe storms, while significant over the long term, are second to wildfires in the damage they cause.

Davis said the Rapid City area is “hail central” for South Dakota. In the 28 years he led his agency, hailstorms have been responsible for 28 catastrophic losses, he said. Davis retired from the agency last year but remains involved in training agents, and one of his children now runs the agency.

In general, catastrophes have caused greater damage in recent years. In the 1980s, the U.S. reported an average of 1.8 billion-dollar disasters per year compared with 14.4 per year in the 10 years ending in 2023; damage estimates were adjusted for inflation and disasters that primarily caused crop damage or were insured by the government were excluded. In Ninth District states, there were 0.4 such disasters per year in the 1980s compared with 4.8 in the recent 10-year period.

Experts at NCEI cite a combination of factors behind the greater frequency of catastrophes. Climate change likely plays an important role, from increasing the power of hurricanes to lengthening wildfire season.

NAIC’s analysts say that insurance regulators have observed that hail season also appears to be longer, a trend scientists expect to continue as the climate warms. Hail season in South Dakota, for example, has increased from an average of 138 days in the 1970s to 173 in the 2014–2023 period, according to National Weather Service records. That’s an extra month of hail each year.

More homes have been built in at-risk areas over the decades, as well, making catastrophes more damaging when they occur. For example, a study by Montana-based Headwaters Economics found that between 1990 and 2018, the number of homes built in areas at high risk of wildfires almost doubled.

The inflation of construction costs has made rebuilding after catastrophes more expensive for insurers. Between December 2017 and December 2023, the U.S. Census Bureau’s price index for single-family home construction increased by 50 percent compared with overall inflation of 25 percent.

Insurance rates going up for insurers

Because catastrophes can cause severe damage across a large area, they can cause severe losses to insurance companies. To reduce their risks, insurers also buy insurance called “reinsurance.”

Many insurers are relying more on reinsurance as they develop more sophisticated risk models, according to S&P Global’s Zawacki. “Companies have a better sense of exactly how much they will be on the hook for without reinsurance,” he said. “Maybe it’s not buying more reinsurance. Perhaps, they were under-reinsured previously.”

But reinsurers have also faced financial stress from catastrophes not just in the U.S. but worldwide, raising the cost of reinsurance for insurers. In the past couple of years, an index that measures reinsurance costs for property insurers, which includes homeowners insurance providers, has increased by double digits, including 15 percent in 2022 and 35 percent in 2023, according to reinsurance brokerage Guy Carpenter.

Insurers have passed on at least some of those costs to their policyholders.

Shrinkflation for insurance

But comparing average premiums doesn’t tell the whole story.

For example, insurance agents say that there are now greater differences among homeowners within the same region compared to the past.

In the past, all homeowners within the same ZIP code might pay the same rate per dollar of coverage. But with the data and computing power available today, insurers can determine if homeowners in one census tract are more vulnerable to hail damage than those in an adjacent tract.

Davis discovered this when a client, who was house hunting, inquired about two new and very similar homes within the same subdivision. The premiums quoted by the insurer for one home were $400 to $500 more than the other. Asking around, he said, “I was able to get an actuary that said, ‘You know, it could be that one of [the homes] is closer to prior catastrophic losses.’”

In addition to increasing premiums, insurers have adopted a similar strategy to the food manufacturers’ “shrinkflation” strategy, where packaging shrinks while prices stay about the same. Homeowners are seeing their standard coverage decrease while their premiums increase; to receive what used to be standard coverage, homeowners often must pay more.

In hail-prone areas like the Upper Midwest, homeowners are responsible for a significantly larger share of roof repair costs, according to Zawacki. For most kinds of damage, such as fire, deductibles are usually $1,000 to $2,000. Hail damage used to be treated the same way, but insurers have changed hail deductibles to a percentage of a home’s value, commonly 2 percent. On a $350,000 home, close to the median in Rapid City, that would amount to $7,000. In addition, insurers are refusing to pay full replacement costs for older roofs and are subtracting depreciation.

Davis said many insurers also exclude coverage of metal trims and doors. A garage door alone could cost a homeowner $2,000 to $3,000, he said. “What companies do is they’re peeling away layers of their coverage, trying not to make such huge increases [in premiums].”

In some areas of especially high risk, insurers have retreated, canceling or refusing to renew existing policies and not writing new policies. Wildfire-prone California and hurricane-prone Florida have seen much of this, but other states are beginning to see it, too. In the Ninth District, there have been reports of insurance companies pulling out of parts of Montana, Minnesota, and South Dakota.

Zawacki said insurers are growing wary of the Upper Midwest because of the risk of severe storms. “Minnesota, Wisconsin, South Dakota, Iowa, Colorado, Oklahoma, Nebraska, Texas. These states are all under really close scrutiny by the carriers to make sure that they’re not overexposed to some outsized losses.”

In Minnesota, Dreier said she’s monitoring the state’s insurance market so the state can take proactive steps to keep it healthy. One example, she said, is launching a program to help homeowners fortify their roofs in exchange for premium discounts. “One of our roles in Commerce is to make sure we’re protecting people in all of this and also that we still have an insurance market to begin with.”

Homeowners taking on more risk

After 2023’s big premium increases, the pressure on insurers appears to be easing.

There have been fewer and less damaging catastrophes so far in the U.S. and Ninth District states in 2024. Meanwhile, industry analysts say insurers are in better financial shape than a year ago as premiums catch up with expenses.

That’s expected to slow down premium increases, but not by much. Reinsurance giant Swiss Re expects property and casualty insurers to increase premiums by 8 percent in 2024, compared with 10 percent in 2023.

But that means rates are still going up faster than inflation and wages. Homeowners have responded by shopping around and choosing less expensive insurance coverage.

“They’re picking up more of the risks themselves,” Davis said. “That’s what insurance is. It’s a transfer of risk for a fee. Well, if you transfer less of it, the fee goes down.”

In some cases, homeowners may be picking up all of the risk. A recent Consumer Federation of America report found that around 7 percent of U.S. homeowners didn’t have insurance coverage. It’s higher in states with more catastrophes and higher premiums, such as Florida, and largely rural states where wages tend to be lower, such as Montana and North and South Dakota.

Having observed many social media ads urging homeowners to drop their insurance, Zawacki said he fears it’s a growing trend. “Having had a large claim on my house at one point, it just blows the mind how all the costs add up. We know from the data about savings rates that most folks don’t have the financial wherewithal to retain the full amount of the cost they would require to rebuild their homes.”