Why Covid Means Higher Home Insurance Costs – Forbes Advisor


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Anna and Luke struggle to build a patio on their Barnegat, New Jersey home. Some contractors don’t return phone calls, while others offer “take it or leave it” prices if they call back. Meanwhile, the prices of materials, especially lumber and cement, are rising by double digits. The couple have finally found a builder, but they have to stay home while waiting for workers who show up sporadically, stay a few hours, then leave for another job.

Most of their problems can be traced back to the Covid pandemic, which will soon enter its third year. Not only does this choke the supply chain and add to a shortage of skilled labor, but it creates additional demand for new construction from those who wish to renovate, rebuild, or in some cases buy a new one. home in what they hope will be a safer place.

The consequences of Covid are also increasing the cost of insuring homes, in some cases even more than the wave of inflation currently overwhelming the country. In California, Florida and Louisiana, insurance premiums have increased an average of 20 to 30% over the past year, according to the Insurance Information Institute. The current inflation rate is around 6%.

Despite soaring home insurance rates, many industry players believe the Covid crisis is manageable. “The effects of Covid-19 premium insurance will eventually wear off,” said Bob Hertel, who manages product development for Acuity Insurance. “Shortages of materials and labor are likely to catch up with demand and these trends are already happening.”

Although he admits that this is accompanied by even higher inflation, “many economists believe that the high inflation trends are transient and will return to normal in two years.”

And the National Association of Realtors (NAR) chief economist Larry Yun has predicted that house prices, which have risen 12% on average in 2020 and 2021, may normalize in 2022.

Omicron adds to financial problems

The Covid shows no signs of declining. Instead, it spawns new forms of itself, like the Omicron variant, which sent shockwaves through the stock market, knocking it down 900 points the day after Thanksgiving, the biggest loss ever. a trading day of the year. Another worrying factor is that many countries have closed their borders to other countries, which is likely to prolong supply chain shortages.

While President Biden says Omicron is “not a cause for panic,” the World Health Organization has so far said his risk is “very high” and could lead to flare-ups with “severe consequences”. In his testimony to Congress on the last day of November, the Chairman of the Federal Reserve Jerome Powell repeated familiar threats: Omicron could “intensify supply chain disruptions” and “slow labor market progress.”

Even though 18 million jobs have been created since the United States emerged from its first lockdown in 2021, the country still faces an employee shortage.

Ultimately, skills shortages and higher material costs weigh on home insurance buyers. “Home insurance is not tied to the market value of a home, but based on the cost of rebuilding,” says Jeff Brewer of the American Property Casualty Insurance Association. This means that not only are premiums going up – already $ 1,400 a year on average – but some homeowners might not be aware they are underinsured.

The “home” coverage limit shown on your home insurance policy is the maximum amount your insurer will pay to rebuild your home. If your home coverage limit doesn’t reflect current labor and material costs, and you experience a disaster such as a house fire, guess who has to make up the shortfall when the insurance is not enough? That’s right, the onus is on the owner.

Billion dollar disasters

While Covid isn’t the only problem, it magnifies other issues that insurers face. Many US insurers continue to shy away from the “global warming” label because of its political overtones, but they are well aware that it exists. “We are seeing more costly catastrophic events in the United States this year, including 18 weather disasters with losses each exceeding $ 1 billion,” says Friedlander of the Insurance Information Institute. Regardless of how you define climate change, this “increased risk” is likely to continue, according to insurers.

The Covid and the influx of bad weather have made insurers worry more about their bottom line – profits, or lack thereof. Major P&C insurers will survive, but the rate of return on their equity is only about half the rate of all Fortune 500 companies, according to Acuity’s Hertel.

And for small home insurance companies, especially those that find themselves on the paths of storms and states ravaged by Covid, the outlook is bleaker. In November, one of the Southeast’s largest insurers, FedNet Insurance, announced it would not renew home insurance policies in Louisiana and Texas in 2022 due to insurance claims resulting from severe storms. . And two other Louisiana insurers, Access Home Insurance and State National Fire Insurance, were recently put into receivership.

Friedlander adds that in his home state of Florida, only three of his 52 local insurers have made a profit.

Adapt to the new normal

What if Covid continued, with horrific weather events like Hurricane Ida, which crossed the country from Louisiana to New York in 2021, killing 95 in the United States and over $ 65 billion in damage?

Be certain: Home insurance premiums will likely increase even if your level of coverage remains the same. But are you also underinsured? Ask your home insurer to reassess the cost of rebuilding your home and compare that cost to your current limit of coverage.

If you are currently underinsured, here are the options to consider:

  • Stick to the current insured value of your home and try your luck, although it doesn’t reflect the inflated cost of rebuilding your home. You probably also have a deductible that would lower your compensation from an insurance claim.
  • Increase your home coverage limit and offset the additional cost a little by increasing your deductible. At the end of the day, if you have a large claim, you will still be impacted by a greater financial burden.
  • Upgrade your “extended replacement cost” home insurance policy, if your home insurer offers this feature. If your home coverage is insufficient, “Extended Replacement Cost” coverage kicks in to add more money for rebuilding. Some companies limit this to an additional 25%, and in areas of widespread destruction like Louisiana, that might not be enough. Companies like Chubb, Erie, and Farmers offer it.
  • Go to “guaranteed replacement cost” if your home insurance company offers it. This ensures that the insurer will pay to rebuild your house, regardless of the cost. In the event of widespread disasters, when demand for labor and materials is peaking, this type of coverage protects you from outrageous cost increases. Companies such as Auto-Owners, Acuity, AIG and The Hanover offer it.

While no one is happy with another higher bill these days, the right home insurance protection pays off in the event of a disaster.

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