Insurance, traditionally considered a safeguard against financial uncertainties, is increasingly becoming a burden for many Americans. Over the last few years, average policy premiums for home, auto, and liability insurance have steadily increased. Insurance companies are facing complex challenges leaving consumers facing rising costs. The intricate landscape of state regulations and reinsurance costs exacerbate the situation.

From devastating hurricanes and wildfires to catastrophic floods and tornadoes, natural disasters are increasing in frequency and cost. According to the NOAA National Centers for Environmental Information, over the past ten years, 152 disasters caused at least $1 billion dollars of damage per occurrence. Catastrophic events result in significant property damage and loss, which causes insurers to reassess their risk models and increase premiums to maintain financial stability. With extreme weather becoming more frequent and severe, insurers are compelled to factor in these heightened risks, inevitably passing cost increases onto policyholders.

The cost of repairing or replacing damaged property and vehicles has increased sharply in recent years. Advanced technology in cars and homes means that even minor damage can result in hefty repair bills. Homeowners bear the brunt of the financial burden and need to have adequate insurance coverage or risk paying out of pocket to repair damage and rebuild their homes. To mitigate their financial exposure, insurers adjust premiums to align with the rising cost of paying claims. Similarly, car owners are navigating rising insurance rates on top of the increased costs of fueling and maintaining their vehicle.

State regulations play a pivotal role in shaping insurance markets, but they can also create tensions and inefficiencies. The regulatory frameworks vary widely from state to state. This makes it challenging for insurers to standardize pricing and underwriting practices. Additionally, some states impose stringent regulations that limit insurers’ ability to adjust premiums based on risk factors. This forces insurance companies to “cross-subsidize” and inflate policy costs for low-risk policyholders in less regulated markets.

For example, to improve access and affordability, state regulators in California impose price controls on insurance companies that restrict them from imposing rate hikes on catastrophe models. So, if a home is proven to be in a high-risk area that is subject to frequent wildfires, the insurance company cannot build that risk into the policy cost. However, the insurance company still bears the financial risk that the home will be destroyed or damaged in a wildfire. As a result, the insurance company will increase the insurance rates for homes located in lower risk areas in a state without these regulations.

Reinsurance, which provides insurers with an extra layer of protection against catastrophic losses, is facing its own set of challenges. U.S. property catastrophe reinsurance rates rose by as much as 50% in January 2024. The increasing frequency and severity of natural disasters worldwide has prompted reinsurers to hike premiums and tighten underwriting standards. This, in turn, trickles down to primary insurers, who pass on these higher costs to policyholders.

Some homeowners in high-risk states like California or Florida are being dropped from their policies or choosing to go uninsured because of policy costs. Mortgage lenders generally require property to be insured. If borrowers stop paying for coverage or let the policy expire, the mortgage lender can buy insurance and charge the homeowner for force-placed insurance. These policies can be twice as expensive and usually only protect the lender – not the homeowner.

Policyholders have limited options to reduce costs. They can explore bundling options which combine the cost and coverage of different policies. They can increase their deductibles, which increases the out-of-pocket costs when filing a claim. They can implement risk mitigation measures to lower premiums, such as adding hurricane shutters to a home or taking a defensive driving course. Additionally, conducting periodic insurance “audits” may reveal that certain coverages in place may no longer be needed or can be reduced. For instance, a policy floater providing coverage for collectibles may be able to be reduced or eliminated if the collection is sold or gifted.

Insurance costs are quickly becoming a larger percentage of many Americans’ budgets. Having the right insurance at the right price provides protection from unforeseen events and provides a baseline financial cushion. Opting out of insurance is an extremely risky endeavor that should only be considered by those who fully understand the financial consequences of such an option. A financial plan that properly weighs these risks and costs is an indispensable tool for insurance planning. Contact your Eagle Ridge financial planner to take a more extensive look at your insurance policies and risk exposure.