Homeowner's Insurance Rates Increases

The cost of insuring homes is expected to rise by 2.5 percent this year, the smallest increase in six years, according to industry experts.

The projected increase represents a continuing slowdown from 2004 when homeowner's insurance rates increased by an estimated 3.8 percent, the Insurance Information Institute observed. The I.I.I. estimates the average cost for homeowner's insurance in 2005 will be $677, up $17 from $660 in 2004.

"Small decreases in the frequency and cost of claims have helped improve insurer financial performance, resulting in a continuing moderation in the cost of homeowners insurance in 2005," said Robert Hartwig, senior vice president and chief economist for the I.I.I.

"With the cost of owning a home in America skyrocketing, sales prices, local property and school taxes, energy costs and now, interest rates on the rise, the moderation in home insurance costs couldn't come at a better time for homeowners," he said.

State Farm Fire and Casualty Co., which is the leading insurer of homes in Illinois and nationwide, insuring about one in every three homes, announced in October an average statewide decrease of 3.7 percent for its Illinois homeowners insurance policyholders. The rates were implemented Sept. 15 for new customers and took effect Nov. 1 for renewing policyholders.

Rate changes for individual customers vary, depending on a variety of factors.

Hartwig said some homeowner's insurance rate increases reflect choices made by consumers themselves.

"Over the past several years, millions of families took advantage of near-record low interest rates, purchased larger homes or made additions and improvements to their existing homes in record numbers," he said. "Bigger, newer and upgraded homes cost more to insure simply because they're more expensive to rebuild or repair." About 41 million homeowners have added to or improved their homes between 2001 and 2002, according to industry figures. In 2003, the most recent year for which annual figures were available, an estimated $177 billion was spent on home improvements.

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Hartwig said homeowners need to make sure these added costs are reflected in their coverage or risk being underinsured. "Insurers are now protecting more homes at greater value than at any time in history," he said, helping propel the home ownership rate to an all-time record high of 69.2 percent in the fourth quarter of 2004 -- a figure substantially influenced by record numbers of minority buyers.

Losses are the most important driver of homeowners insurance premiums. According to the I.I.I., between 1990 and 2002, home insurers paid, on average, $1.17 in losses and expenses for every $1 they earned in premiums.

Between 2000 and 2002 alone, home insurers paid an estimated $13.5 billion more in claims than they collected in premiums, rivaling the $15.5 billion in insured losses from Hurricane Andrew -- still the single most expensive natural disaster in history in terms of insured losses.

But by 2003, results had improved substantially, with insurers paying about 98 cents for every dollar earned, though last year's four hurricanes pushed losses to an estimated $1.01 on each dollar earned.

During the 1990s, the severity of catastrophes began to increase dramatically, Hartwig said. Since 1990, insurers have paid out nearly $150 billion in catastrophe-related losses, or about $830 million per month.

Catastrophes include events such as Hurricane Andrew and the Northridge earthquake, along with hundreds of smaller disasters associated with tropical storms, tornadoes, wildfires, hail, and severe winter weather.

In 2004, insured natural disaster losses soared to $27.3 billion, a record, Hartwig said. Hurricanes Charley, Frances, Ivan and Jeanne that hit the southeast dealt insurers a $22.6 billion blow, accounting for 83 percent of all catastrophe losses in 2004.

"Homeowners insurance rate increases in some parts of the country continue because of the extraordinary costs associated with paying these catastrophic claims," Hartwig said. "In fact, virtually every part of the country is either at risk of or has experienced a billion dollar disaster." While the typical homeowner will pay $677 for home insurance this year, rates do vary significantly from one part of the country to another, Hartwig pointed out. Homeowners in catastrophe-prone states are likely to have the biggest affordability issues, he said.

-Homeowner's Insurance Rate Increases