Inflation’s impact on home insurance rates in 2023

Egg prices. Gasoline costs. Mortgage interest rates. Inflation impacts every part of daily life, including insurance premiums.

While inflation is projected to ease throughout 2023, the latest data from the Consumer Price Index shows a modest increase of 0.1 percent at the end of March 2023, bringing the current inflation rate to 5 percent. In short, the Federal Reserve’s 2 percent inflation target is still far from being realized.

It’s important that insurance premiums accurately reflect the reality of inflation to benefit both policyholders and insurers. When premiums don’t account for increased building labor and material costs, the property is underinsured, leaving policyholders unprepared to fully rebuild their home after a major loss. When inflation isn’t accounted for in replacement cost estimates, insurers won’t collect the proper premium, increasing the likelihood of insolvency after catastrophes.

But what happens if inflation rates decline? Will home insurance rates continue to climb?

Home insurance premiums are rising, but inflation is only one factor

Even if inflation eases, other factors impact the cost of insurance, materials, and home repairs, which can increase insurance rates:

• Higher reinsurance costs: Reinsurance transfers risk from insurers to reinsurers and helps cover the cost of widespread losses. As property catastrophe reinsurance demand continues to outpace supply, reinsurance costs have skyrocketed, increasing by 37 percent, the biggest year-on-year increase in 30 years. When reinsurance costs rise, so do premiums.
• A constrained housing market: When the housing market is tight, home costs tend to rise – and so do the prices of materials. According to the Associated Builders and Contractors, the cost of construction is up more than 37 percent now than before the pandemic.
• Supply chain challenges: Supply shortages, such as for lumber and roofing, can increase the price of resources and cause delays for repairs or replacements. This can worsen the condition of existing damage and drive up claims costs. According to CoreLogic, as of first quarter 2023 alone, building materials costs saw an annual 11.3 percent increase.
• Labor shortages: The pandemic prompted millions to exit the workforce, affecting the availability of labor. Limited laborers means that those available in the market work at higher wages. In 2023, over half a million laborers are estimated to be required to meet labor demands in the construction industry. These costs are absorbed by insurers and, in turn, policyholders.
• Increased construction costs: When material and labor costs increase, it costs more overall to reconstruct a home after a covered loss. These costs are passed on through premiums.
• Increased exposure to risk: Homes that are most vulnerable to damage, such as those with aging roofs or in catastrophe-exposed areas, can pay higher premiums irrespective of inflationary outlook.
• Claims history: A homeowner’s claims history and their property’s condition can impact premiums. For instance, homeowners who file several claims over a short time may pay higher premiums just like those who have less resilient homes.

As construction and home replacement costs rise, so do the costs of claims. Inflationary pressure has caused significantly higher costs, especially in cat-prone markets where construction materials and services are in high demand after natural disasters.

Additionally, as the technology within homes becomes more sophisticated, repair and replacement costs increase.

A prudent insurer will proactively account for higher costs, typically by increasing Coverage A limits to reflect inflation’s impact on replacement costs.

Why is Coverage A adjusted for inflation?

Coverage A, known as dwelling coverage, covers damage to the home’s structure. Coverage A limits are based on the home’s replacement cost – the cost to rebuild the home from the ground up after a total loss. Coverage A limit must be increased to address inflation’s impact on building labor and material costs so the home isn’t underinsured when it’s time to make a claim.

Many policyholders have experienced premium increases over the last two years due to these adjustments – something they should take comfort in. According to the Insurance Information Institute, in general the property and casualty industry has lagged in adjusting rates for inflation, leaving homeowners vulnerable to unexpected out-of-pocket costs when they experience a loss. An insurer that proactively insures homes to value is safeguarding policyholders against being underinsured.

How SageSure is responding to inflation

Some insurers provide coverage up to 80 percent of a home’s replacement cost instead of insuring a home to its full estimated value. Others increase Coverage A limits by a small percent that doesn’t keep pace with the high inflation we’re experiencing today.

Both approaches can leave a coverage gap exacerbated by inflation.

Even before last year’s period of record-high inflation, SageSure’s integrated replacement cost methodology was in place to rapidly respond to changing market conditions and to ensure each property is insured to value. While other providers may not have coverage increases referenced in their products or may require regulatory approval to change filings to address higher inflation rates, SageSure’s product can adjust the exposure base for increases in building cost inflation immediately. SageSure also adjusts Coverage A at every renewal to reflect the full value of building materials and inflation, ensuring policyholders and their homes remain protected.

To learn more about our approach to inflation, check out our inflation dashboard here.