Home insurance, also called homeowners insurance, provides financial protection to you for any loss or damage to your home and its contents. Because your home is one of your most valuable assets, it is only logical that you have it insured against uncertain circumstances.
A policyholder would be required to pay a certain amount, also called premium, for insurance cover. However, premium amounts tend to increase with each passing year and this deters some from purchasing a home insurance policy. But, despite the increase in premiums, it is prudent that you buy home insurance because factors that increase premiums might or might not be in your control.
Here are a few reasons to explain the surge in premiums.
- Number of claims
The insurance business is like any other business where the insurer is seeking to make profits. So, when the number of claims increase, the insurer will aim to offset these costs by increasing the premium rates charged from the customer.
- Increase in natural catastrophes
In the insurance sector, industry loss ratio is calculated as the amount paid as claims divided by the amount collected as premiums. Whenever the industry loss ratio is high, the rates of home insurance will show a significant increase as the insurer is spending more and will seek to compensate for or redeem his costs by passing it on to the customers.
Now, whenever there is an increase in frequency and severity of natural catastrophes such as wildfires, storms, or floods, the number of people applying for claims increase. As a result, the amount paid as claims, naturally, increases, causing the rates of insurance to increase. And with the world being adversely impacted by global warming and the ensuing calamities, home insurance rates are bound to inflate.
A case in point is the catastrophic Camp Fire that ravaged California in 2018. At $16.5 billion, it was considered one of the most expensive natural disasters in terms of insured losses for that year. The insurance industry of California posted a loss ratio of over a 100 per cent that year. Consequently, their rates showed steep increases in the subsequent years.
- Increase in construction costs
Home insurance compensates for the cost of restoring, rebuilding, and repairing a home. So, when there is an increase in cost of construction, which includes labour cost, resource cost, and material cost, home insurance rates are bound to soar.
- Construction of bigger, modern houses with high-end amenities
With the overall standard of living getting better, homes are getting bigger and advanced, and their amenities are getting more luxurious, fancy, and expensive. Because home insurance is directly dependent on the cost of rebuilding the home, bigger homes with high-end amenities will tend to shoot up insurance rates.
For instance, houses constructed with sophisticated facilities such as swimming pools, spiral staircases, trampolines, solar panels, high-efficiency appliances, and bath tubs significantly increase the replacement costs. Thus, the costs of insurance in such cases also increases.
- Increase in commodities in the house
Most houses today have many expensive commodities such as televisions, laptops, tablets, furniture, washing machines, and cutting-edge kitchen appliances. Such contents drive up insurance rates as the cost of replacing them is substantial.
- Deterioration of municipal infrastructure
As the infrastructure provided by the government gets outdated and archaic, there is an increase in claims, thus causing an increase in the home insurance rates.
For instance, aging and waning municipal infrastructure could result in more claims for basement floods and sewer back-ups, escalating insurance claims and thus insurance rates.
- Inflation
One of the main reasons for an increase in home insurance costs is inflation, which is the rise in prices of goods. Simply put, insurers compensate for inflation by increasing their rates. So, even if nothing significant has changed in the past year in your home or neighbourhood, inflation can certainly cause the premium rates to surge.
Now that you are aware of the factors that increase the home insurance rate, you’d realize that it is only logical that rates surge with time. But, this is no reason for you to be dissuaded from purchasing one. Remember that the premium is only a very miniscule amount in the event that your home encounters an unforeseen or unfavourable circumstance.