Why Is My Homeowners Insurance Premium Going Up?
June 8, 2022 by Brad Davis, CIC
This is not a new question by any means, but it is truer now than before (at lease since 2004 when I got into insurance). There may be 100 reasons why Home Insurance premiums are on the rise in Myrtle Beach and all over, but we can focus on 4 factors causing serious disruption to the insurance market.
Oh, and this does not account for individual factors such as age of home, credit profile, previous claim record, distance to ocean, age of roof, etc. Each of those components can cause large swings in the total premium of your Homeowners Insurance premium!
1. WE ARE ENTERING A HARD MARKET
The Home Insurance market has been soft for several years. Many insurance companies entered the market and drove down premiums. While this was great for the policyholders in South Carolina, it narrowed the margins for insurance companies.
We are now at a point where several home insurance carriers can no longer sustain low rates - answer to that is either raise rates (like 10% - 40%) or become insolvent. As of today, I believe 6-7 companies have gone insolvent in the last twelve months that have impacted the Home Insurance market in South Carolina (and it could be more later this year).
What a hard market means is there will be less insurance companies competing for your business. It's simple supply and demand.
A little side note here that most people don't know - insurance companies (even in good years) operate on low margins already.
2. HIGHER THAN NORMAL INFLATION
It is pretty much common knowledge at this point that building materials and labor costs have going up sharply in the last year. This directly affects Homeowners Insurance policies. If it costs more to build a new home, then it also costs more to repair or rebuild a home. Hence, Coverage A (Dwelling) needs to be increased to make sure you have adequate coverage. Of course, more coverage brings more premium.
Another part to this is how fast insurance companies can react. Let's just say a typical insurance company can see building costs about to dramatically increase - like they have a crystal ball so they could predict COVID-19 (or what may come of it), supply shortages, transportation issues, or whatever; how fast can they respond? The insurance company has thousands of policies that basically need a rate increase almost immediately to remain profitable or even stable. But typically, in South Carolina, the Department of Insurance will only allow admitted insurance carriers to make one rate adjustment per year.
Unfortunately, insurance companies are often playing catch up and could lose millions in the meanwhile.
3. INSURANCE PREMIUMS ARE AFFECTED GLOBALLY
You may wonder why insurance premiums are going up in Myrtle Beach since we haven't had a bad hurricane lately. That is good, as companies do rate accordingly to the location, likely hood of potential claims, past claim history (and other stuff). For example, an insurance premium for a home in Greenville, SC may be roughly half as much compared to a home in coastal South Carolina. It makes sense, there is a lower risk for hurricane damage farther from the coast (although the upstate sees more hail claims).
Almost all home insurance companies buy reinsurance. Instead of tying up billions and billions of liquid cash, they buy insurance typically to cover large losses from single events. There is more to it, but that is the gist of it. The reinsurance companies are global players providing insurance and reinsurance to companies all over the world - they are truly impacted by loss events everywhere.
4. SOME INVESTORS ARE GETTING OUT OF INSURANCE
This could almost fall under #3 above, but it really demands its own section because how important it is.
Reinsurance companies in the last several years have been heavily funded by investors. Lately investors are not making the returns they used to, or they are losing money. Many investors are getting out of the insurance market and putting their money elsewhere. Reinsurance polices are negotiated every year (kind of like renewing every year), but this year premiums are going up drastically - doubling in cost is not uncommon. This alone is enough to cause companies to go insolvent. The reinsurance costs went up so much some insurance companies could not afford to pay it (nor get enough outside investors to pony up). Rating companies (such as AM Best or Demotech) see this as the company not able to meet future claim payouts and either pull their rating or downgrade them. The next step is typically the company is placed into receivership by their domiciled state.
It's more than just the reinsurance market. Lloyd's of London is a major player in the insurance world, so much that they influence the world insurance industry. Lloyd's has been strong for as long as I know and are probably still one of the most financial stable insurance markets (if not the most) in existence today. But they rely on investors as well. As investors pull back from or out of the insurance market it reduces the supply of insurance coverage available. To put it simple - imagine having 100 billion from investors (to fund future potential claims) and then almost suddenly that goes down to 50 billion. Right away Lloyd's (in this example) has half as much capacity, now they can be pickier on the risks they choose to insure and charge more premium. That is just an example, but it is not far off from what is happening all over the globe - it affects everyone.
Some closing thoughts:
- It is going to be more difficult to find lower premiums.
- If you find a lower premium, that does not mean better. I feel strongly about this. We do not sell strictly on premium. I don't think I am daft; I know that is important. But is it worth saving 5% or so for an inferior policy?
- It is really key to work with an experienced agent that is looking out for you and not just trying to make a sale.
- Talk to your agent to make sure you are getting all the discounts possible.
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