The Declining Dream of Affordable Homeowners Insurance

Homeowners Insurance Affordability Wanes Over Past Two Decades, Says IRC Study

The affordability of homeowners insurance has steadily declined over the past twenty years, a trend exacerbated by increasing natural disasters, economic fluctuations, rising construction costs, and litigation. This latest insight into the growing complexity of homeowners insurance affordability comes courtesy of the Insurance Research Council (IRC), a division of The Institutes.

The entity recently issued a comprehensive Homeowners Insurance Affordability report spotlighting significant shifts in the cost burden of homeowners insurance relative to household income, with notable variances across different states.

Escalating Costs Versus Income

Historically, homeowners’ insurance represented a smaller fraction of household expenses. In the 2000s, for example, the average American homeowner spent approximately 1.54% of their household income on insurance. This figure rose sharply, however, in the following decade, with homeowners spending an average 1.99% in the 2010s—a trend that held steady into 2021, the most recent year for which data is available.

Parallel to this, the actual dollar cost of homeowners insurance has surged from an average of $508 annually in 2001 to $1,411 in 2021, marking a robust annualized increase of 5.0%. In stark contrast, household incomes during the same period grew at a much slower pace, with an annualized increase of only 2.5%. This disparity encapsulates the growing affordability gap that impacts many American households.

State-by-State Variability

The study also delves into the geographic disparities in insurance affordability. Utah emerges as the most affordable state, where homeowners spend just 0.96% of their income on insurance.

On the other end of the spectrum, Florida ranks as the least affordable, with homeowners there allocating as much as 4.07% of their income to insurance premiums. Florida, along with Louisiana, has consistently ranked among the least affordable states over the past five years.

Underlying Factors Affecting Costs

The variability in insurance costs across states can be attributed to several factors. These include exposure to significant weather events, which varies greatly by region and significantly influences insurance pricing. Additionally, non-weather-related incidents, patterns in claiming behavior, and the local litigation environment also play crucial roles in shaping overall insurance costs.

Improving Affordability Through Awareness and Regulation

Dale Porfilio, FCAS, MAAA, president of the IRC and Chief Insurance Officer of the Insurance Information Institute (Triple-I), emphasizes the importance of understanding what drives insurance costs. He advocates for increased homeowner awareness and the adoption of protective measures.

“An understanding of what drives the cost of insurance is essential for consumers navigating the current insurance market,” said Dale Porfilio, FCAS, MAAA, president of the IRC. “Efforts to promote homeowner awareness and adoption of protective measures, strengthen state and local building codes, and encourage community resilience programs can all improve insurance affordability.”

“Homeowners insurance in the U.S. is regulated at the state level,” he adds, “…so these comparisons and underlying cost drivers can provide legislators and policymakers with valuable information to help them improve affordability in their states.”