U.S. homeowners are facing rising insurance costs due to a combination of factors, including ongoing inflation, increasing replacement costs, ongoing supply chain issues, and abuse of the legal system. The Insurance Information Institute (Triple-I) highlights these issues in its latest brief, Trends and Insights: Factors Driving Up Home Insurance Rates.

One of the main drivers of rising insurance costs is the increase in building materials prices, which has led to a 55% increase in cumulative replacement costs related to homeowners insurance between 2020 and 2022, explained Sean Kivlighan, CEO of Triple-E.

“Just as Americans are seeing prices of almost all physical goods rise, the main driver of homeowners insurance is building materials, which are an important component used when insurance companies help customers rebuild after a disaster,” Kivligan said.

Moreover, the frequency and severity of natural disasters have increased, especially in vulnerable regions such as the Southeast and Southwest. According to the report, losses from natural disasters have increased tenfold from the 1980s to the 2020s. Coastal development is exacerbating these potential losses.

Another factor contributing to rising costs is abuse of the legal system. Kivlighan noted that “billboard lawyers” encourage litigation as a first resort, driving up insurance costs. The lack of transparency in third-party litigation funding, now a multi-billion dollar global asset class, is particularly troubling. Foreign investments in these funds pose a potential threat to national security and are often tax-free.

Mitigating risks and losses

The report noted that the insurance sector is struggling to maintain profitability, with a combined net profit ratio of 110.9 in 2023, representing the worst underwriting results since 2011. Insurers paid out nearly $1.11 for every dollar taken in last year.

Triple-E notes that slowing inflation and lower interest rates by the Federal Reserve could boost new home sales and homeowners insurance growth. But insurers must balance investment income from higher interest rates with the need to control inflation and stabilize costs.

“Insurance companies play a vital role in the economy, protecting against financial losses caused by unforeseen events such as natural disasters,” Kivlijan said. He warned that unprofitable insurance companies that are unable to meet their financial obligations would leave policyholders vulnerable.

The Insurance Information Institute (Triple-I) is a leading source of insurance information in the United States, with more than 50 member companies. The organization is dedicated to advancing consumer knowledge by providing information about insurance. Triple-I is part of the Institute’s Risk and Insurance Knowledge Group.

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