Seeing your home insurance go up at renewal can be a frustrating experience for homeowners, especially if they don’t understand the reason behind the increase. In fact, we often hear from customers who wonder why their insurance premium increased when they haven’t filed a claim.
The truth is that your individual claims aren’t the only thing that impact your home insurance costs as you might think. Other factors, like an increase in claims frequency for all homeowners in your area or your home’s value, usually have a bigger effect. Let’s take a look at what goes into your home insurance premium, what causes your premium to go up, and ways you may be able to keep costs down.
What are home insurance premiums?
Before we discuss why home insurance costs go up, let’s take a look at what an insurance premium is. Home insurance premiums are annual payments that you pay to your insurance company in exchange for financial protection against certain types of losses to your home, other structures on your property, and your personal belongings. Your home insurance premium also goes towards protection in personal liability claims.
Insurance companies evaluate many factors to determine your home insurance premium, including:
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Where you live.
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The value of your home.
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The amount and types of coverage you purchase.
Common reasons for rising home insurance costs
One important thing to know about rising home insurance costs is that insurance companies are required by law to set rates that are actuarially sound, meaning rates can't be excessive or insufficient. Basically, that means they have to strike a balance between providing coverage at a fair price while still meeting their obligations – and sometimes striking this balance means your insurer has to raise its rates.
But that’s not the only reason your home insurance may go up. You might also see an increase if there’s been changes to your home’s value or your insurance needs. In this section, we take a closer look at each of these.
Increased claims in your area
A large number of claims in any one location may cause your insurance company to raise its rates in that area in order to meet its obligations to its policyholders. Perhaps the most noteworthy reason for this is natural disasters. An insurance company often has lots of expensive claims all in one region when a disaster hits.
One disaster probably won’t make premiums go up, but an increase in the severity or frequency of natural disasters will. Unfortunately, climate change is making that more likely.
Fraud, however, can also be a factor in the number of claims insurance companies see. Florida is a good example of this issue. Assignment of benefit scams in homeowners insurance were so rampant in the state that the legislature passed a law in 2022 banning these agreements.
Changes in your home's value
Home improvements increase the value of your home, as do general increases in the cost of housing. These can also make your premiums go up – especially if your home value increases as a result of additional square footage or substantial improvements to the quality of a room.
For example, upgrading from particle board cabinets to custom cherrywood cabinets is a big difference in the cost to replace them if you have a claim.
Inflation and rising construction costs
High construction costs can cause a home insurance price increase, and that’s at least partly due to inflation. But inflation and construction costs can also impact your homeowners premium more directly.
When construction costs are high, it costs more to rebuild your home – which means you need more dwelling coverage in your policy. So your insurance rates may increase if your limits are adjusted to account for inflation and the cost of rebuilding your home.
Adjustments to coverage and coverage limits
Changing your coverage amounts or the types of coverage in your policy may increase the risk to the insurance company and can translate into higher premiums. Increasing liability coverage limits, for example, or adding a flood insurance endorsement, provide additional protecting but also come with higher costs.
Personal claim history
If you’ve filed a property insurance claim in the last three to five years, that can also increase your cost of coverage – though perhaps not as much as you might think. For example, catastrophic claims might have little to no impact on premium because many states have laws to keep insurers from holding these claims against policyholders or applicants.
In some cases, having filed a claim may not raise your cost directly – it may just make you ineligible for some discounts.
Changes in local legislation and regulations
State laws can change from time to time, and new regulations may impact how much you pay for your coverage. For example, your state may pass a law requiring homeowners in certain areas to carry a certain type of insurance or a particular endorsement. That new law would likely cause the cost of home insurance coverage to go up.
How to reduce your home insurance costs
Many of the factors that increase the cost of your home insurance are beyond your control, but there are steps you can take to lower your premiums. These include shopping around, increasing your deductible, or making strategic improvements to your home that lower the risk to your insurer.
Review and compare insurance policies
One of the most important steps you can take to lower your cost of coverage is to shop around and compare insurance companies and individual policy options. Consider carefully your specific needs and choose a policy that adequately addresses your risk and has a premium you can afford.
How often should I review my home insurance policy?
While home insurance policies often renew automatically each year unless you cancel, you should still review your coverage at least once per year to make sure it’s appropriate for your needs. Be sure to consider any changes you’ve made to your home or any other changes in your circumstances that may affect your risk.
Replace aging infrastructure – especially your roof
An older home with outdated systems can be costly to insure, especially if your roof is reaching the end of its useful life. Investing in a new roof, plumbing upgrades, or replacing recalled electrical panels not only makes your home safer, they can also make your homeowners insurance more affordable in the long run.
Consider increasing your deductible
One of the easiest ways to decrease your annual premiums is to choose a policy with higher deductibles. This increases your out-of-pocket cost in the event of a loss, but it decreases your annual premium. However, it’s important to choose a deductible that you can afford to pay out of pocket if you have a claim.
Implement safety and security measures
Another straightforward way for you to lower your cost of home insurance is to install safety features like smoke detectors and a home alarm system. These tools increase your ability to stop losses, thereby decreasing your risk. Many home insurers offer discounts for homeowners who install these types of devices.
Many factors that drive the rising cost of home insurance, like state laws, local risks, and even inflation, are out of your control. But that just means it’s really important to take care of the things you can control. Understanding these factors can help you take proactive steps to reduce your risk and lower your cost of coverage.
