Why Have Insurance Rates Gone up So Drastically in Recent Years?

Many policyholders are wondering one thing: why are insurance rates going up? If you’ve recently applied for a new insurance policy or received a renewal notice for an existing policy, you may have been hit with higher premiums. Many factors are contributing to rising rates, but some insurance companies and lines of coverage are more affected than others. The good news is landlords and HOA board members can take steps to control their costs. 

Property and casualty insurance premium hikes

Insurance premiums have been rising for a while – some lines of insurance have even seen double-digit increases.

According to the Property/Casualty Market Report Q2 2022 from The Council of Insurance Agents & Brokers, the second quarter of 2022 was the 19th consecutive quarter to see premium increases. Overall, premiums increased by an average of 7.1% in the second quarter for all account sizes. Commercial property rates were up 8.3%, commercial auto rates were up 7.2%, general liability rates were up 4.7%, and umbrella liability rates were up 11.3%.

In some parts of the country, the property rate increases have been much steeper. According to NPR, Florida homeowners have seen premiums rise by about 33% each year, compared to the average national increase of about 9% per year.

In an interview with Honeycomb at the end of 2022, Jason Bott, Vice President of Robertson Ryan & Associates, the largest independent insurance agency in Wisconsin, said he expects insurance premiums to keep increasing by 10%-15% in 2023.

The many factors behind the increase

It’s impossible to point to a single reason that explains all the recent rate increases. Insurance rates can be complicated, and in this case, many issues are at play. The key factors also vary depending on the region, type of insurance, and industry. 
Nevertheless, it is possible to identify certain factors that are playing an important role in rising rates. Many of these factors relate to either inflation and the economy or claims frequency and severity. 

Inflation and the economy

Inflation has reached levels not seen since the early 1980s. The U.S. Bureau of Labor Statistics says the Consumer Price Index increased 9.1% in the 12-month period ending in June 2022. Nearly everything, from food to electricity, is significantly more expensive than it was just a year ago.

Rise in replacement costs

Building materials have also increased in price. The Q4 2021 Commercial Construction Index from the U.S. Chamber of Commerce found that 97% of contractors believed material cost fluctuation had impacted their business and 95% had experienced a material shortage. 

Below is a table of the average replacement cost by square feet in the states where Honeycomb operates (updated November 2022):

Rising costs and supply chain issues can make insurance claims more expensive. For example, if you need to fix the roof on your property, increased roofing costs will make the repairs more expensive. Plus, supply shortages may mean repairs take longer, further adding to the costs. When this happens, the insurer’s profitability is reduced, which in turn, can result in higher insurance rates at the next renewal. 

Claims frequency and severity

Higher insurance costs can also be attributed to an increase in claims frequency and severity. For example, the surge in ransomware has led to a steep increase in cyber insurance rates. Other claims trends are impacting other types of insurance, including property insurance and liability insurance – the primary coverages needed by landlords and HOAs.

Natural disasters are a major factor – property owners in places with severe hurricane and wildfire risks have seen some of the biggest rate hikes. The National Oceanic and Atmospheric Administration (NOAA) says the U.S. experienced 20 separate weather and climate events with losses of at least $1 billion in 2021. In 2020, there were 22 such events. Historically, this is atypical. The number of $1 billion events has increased significantly in recent years, even when adjusted for inflation. For homeowners and landlords, these natural disasters can result in higher insurance costs

Lawsuits are another factor – both landlords and HOAs are susceptible to litigation. The Insurance Information Institute says that Florida in particular has been subject to a high volume of litigation and roof-replacement scams. Insurers in the state may end up paying attorney fees that are larger than the awards, due to the state’s attorney fee rules. 

Jury awards have also become much larger. The term “social inflation” describes the booming trend of jury verdicts that award very large sums to plaintiffs involved in lawsuits against businesses. When this occurs, insurers foot the bill up to the defendant’s policy limits. This is another factor that reduces insurer profitability, causing higher insurance rates for all policyholders.

More rate hikes may be coming

It seems likely that insurance rates will continue to increase. Property Casualty 360 says auto insurance rates could increase by 12% in 2023. Meanwhile, many experts predict that the losses from Hurricane Ian will further disrupt the southeast property insurance market and result in even higher insurance costs.

Policyholders who are budgeting based on old insurance rates may find themselves in a difficult situation when they’re hit with a rate hike. It’s important to be aware of the widespread insurance market conditions to plan for how they will impact your finances. By taking proactive steps now, you may be able to avoid massive rate hikes. 

Keeping your landlord insurance costs down

Fortunately, there are steps landlords and HOAs can take to keep their insurance costs down. Preventing claims is critical. Securing the right insurance terms is also crucial. Another thing you can do is shop around for the best rates.

Honeycomb Insurance specializes in landlord and HOA/COA insurance. As a niche provider of specialized insurance coverage, we are less affected by the macro trends impacting the insurance market as a whole.

Are you paying too much for insurance? Insurance premiums are going up, but you can save money to keep your budget under control. With Honeycomb, you could save up to 40%. Get a quote.