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NEW YORK, June 2, 2004 - The cost of insuring homes is expected to rise by 2.8 percent in 2004, the smallest increase in five years, said the Insurance Information Institute (I.I.I.).
The projected increase represents a substantial slowdown from 2003 when homeowners insurance costs rose by an estimated 7.4 percent, the I.I.I. observed. The average cost for homeowners insurance in 2004 is estimated at $608, up $17 from $591 in 2003.
"Small decreases in the frequency and cost of claims have helped improve insurer financial performance, resulting in a significant moderation in the cost of homeowners insurance in 2004," said Robert Hartwig, senior vice president and chief economist for the I.I.I.
Average Expenditure on Homeowners Insurance
* III estimates based on U.S. Bureau of Labor CPI data, company filings and trend projections.
Sources: National Association of Insurance Commissioners, Insurance Information Institute
"With the cost of owning a home in America skyrocketing - sale prices, local property and school taxes, energy costs and, now, interests rates on the rise, the moderation in home insurance costs couldn't come at a better time for homeowners," he said.
Hartwig pointed out that some of the increase in the cost of homeowners insurance reflects 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."
Approximately 41 million homeowners have added to or improved their homes between 2001 and 2002. In 2001, the most recent year for which annual figures were available, an estimated $166 billion was spent on home improvements.
He noted that home owners 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 that at any time in history, helping propel the homeownership rate to an all-time record high of 68.3 percent in 2003-a figure substantially influenced by record numbers of minority buyers," he observed.
Cost Drivers in Insurance
Losses are the most important driver of homeowners insurance premiums. According to the I.I.I., between 1990 and 2002, home insurers paid out, on average, $1.17 in losses and expenses for every $1 they earned in premiums.
Between 2000 and 2002 alone, homeowners insurers paid out 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 most expensive natural disaster in history in terms of insured losses. But by 2003 results had improved substantially, with insurers paying out an estimated $1.03 for every dollar earned.
During the 1990s, the severity of catastrophes began to increase dramatically. Since 1990, insurers have paid out more than $120 billion in catastrophe-related losses - or about $715 million per month. Catastrophes include well-known events such as Hurricane Andrew and the Northridge earthquake, but also hundreds of smaller disasters associated with tropical storms, tornados, wildfires, hail, and severe winter weather.
In 2003, there were three, billion dollar-plus disasters in 2003, including the California wildfires ($2.0 billion) and Hurricane Isabel ($1.7 billion). Altogether, insured natural disaster losses totaled nearly $13 billion in 2003, the third highest year on record. Mold-related claims had also become a multi-billion problem by 2002.
"Homeowners insurance rates in some parts of the country continue to rise because of the extraordinary costs associated with paying these catastrophic claims," said Hartwig. "In fact, virtually every part of the country is either at risk of or has experienced a billion dollar disaster."
While the typical American homeowner will pay $608 for home insurance in 2004, rates do vary significantly from one part of the country to another. He also pointed out that many home owners in coastal regions vulnerable to devastating storms assume a larger portion of the risk through higher deductibles - usually a percentage of the insured value of the home.
Underinsurance: A Chronic Problem Among Homeowners
A home is the most valuable asset most people will ever own. It is therefore very surprising that nearly two-thirds (64 percent) of all homes in America are underinsured by an average of 27 percent.
Insurers are working to address this problem in a variety of ways, including calculating insured value by looking at a home's individual components rather than the traditional square-footage methods. They're also advising policyholders to purchase inflation-guard endorsements on their policies, which automatically adjust the amount of insurance purchased each year to reflect increases in local building and reconstruction costs.
These endorsements cost only a few dollars a month but can save you tens of thousands of dollars down the road should disaster ever strike. To illustrate just how quickly insurance coverage can become inadequate, a home purchased in 1994 with an insured value of $100,000 would cost at least $134,000 to rebuild today, assuming a modest 3 percent inflation rate in repair and rebuilding costs.
"Ultimately the responsibility for making sure a home is insured to its proper value rests with the homeowner," said Hartwig. "People have put record amounts of money into their homes in recent years, but many have neglected to inform their insurer. Others have simply failed to recognize that construction costs, like everything else, rise over time."
"Without adequate insurance a family can be left without sufficient resources to rebuild, while still owing large sums on mortgages and home equity loans," said Hartwig. "These problems can easily be avoided with a simple call to an agent or company representative whenever significant improvements are made to a home."
For additional information on homeowners insurance, access the I.I.I.'s website at www.iii.org.
The I.I.I. is a nonprofit communications organization sponsored by the property/casualty insurance industry.