Rate Check: More pain for US homeowners as insurers play catch-up on inflation

The cost of homeowners insurance in the US is likely to remain elevated in the near term even as the official inflation rate has cooled in recent months.

While the latest Consumer Price Index numbers from the Bureau of Labor Statistics, released June 12, reported a 3.3% rise in May, this figure stands in significant contrast to what homeowners across the US are now paying to insure their homes.

Approved rate increases in 2024 by insurance companies for owner-occupied homeowners insurance approved prior to June 3 have risen 6.9%, according to an S&P Global Market Intelligence analysis. That is on top of the 12% increase for 2023.

A record number of billion-dollar weather events in 2023, higher material and labor costs as well as claims fraud and abuse have led to insurers going back to regulators seeking rate increases. However, those increases are lagging, not leading indicators of inflation, according to Karen Collins, vice president for property and environment for the American Property Casualty Insurance Association.

"A lot of the premium increases [today] are for cost trends that we've seen a couple of years ago," Collins said in an interview. "In many states, [insurers] wait for the regulatory approval to implement those changes and then they take up to a year or more to actually have those changes flow in."

In addition, some insurers have limited their appetite for homeowners business in areas prone to severe convective storms and other natural perils in certain areas which also drives up costs by reducing coverage availability. Also, a growing number of carriers have implemented wind-and-hail deductibles in a wider range of geographies in response to a higher frequency of severe weather events.

The full picture

Another reason behind the divergence between the Consumer Price Index (CPI) and the cost of home insurance is due to the make-up of the index.

While the CPI spells out in detail how motor vehicle repair and insurance are affected by inflation, homeowners insurance is not included in the index. Tenants' and household insurance is the only residential coverage included in the CPI, which is "focused on consumption," Steve Reed, an economist with the Bureau of Labor Statistics, said in an interview.

Reed said neither the purchase price of a house nor the monetary value, or capital, associated with it are included in the CPI.

"The weight of that is based on what renters would pay to ensure their possessions and also a portion of what homeowners pay for their insurance," Reed said in an interview.

According to an analysis by S&P Global Market Intelligence, the CPI's home insurance figures track most closely to renters' insurance rates founds in statutory filings.

Reed added that while there have been some discussions about looking at research indexes that could measure housing in a different manner, no major changes to the CPI have been considered.

"Our general methodology and the general decision to make ... the capital part of the house out of scope goes back a long time," Reed said. "It's something that I'd say a lot of thought deliberation has already gone into."

Lumber and labor

When discussing the surge in homeowners rates and inflation, a key factor is the high cost of materials used for residential construction, specifically, wood.

The price for 1,000 board-feet of lumber was $264, according to Trading Economics, on March 30, 2020, just after the pandemic stay-in place mandate went into effect. A board foot is a measurement of volume when purchasing multiple boards of lumber.

Just over a year later, on May 3, 2021, the price had soared to $1,686. As the effects of the pandemic and inflation eased, the price dropped to $1,441 by Feb. 28, 2023, and has since fallen to $499.08, but still 89% higher than the price at the start of the lockdown.

One example of the rising cost of repairs can be seen in the performance of State Farm Lloyds in Texas where severity rates, which measure the cost of an insurance claim, have risen significantly in recent years.

Along with the high cost of materials, there has also been the challenge of increasing the size of the labor force for residential building, said Michel Leonard, chief economist for the Insurance Information Institute Inc. The labor market was "significantly disrupted" by the pandemic, Leonard said.

"Post pandemic, a lot of people retired and before the pandemic [workers] had double and triple shifts and no longer wanted to do that," Leonard said in an interview. As a result, it remains difficult to procure labor for the smaller jobs that large contractors will not handle.

"There are still delays and labor is more expensive," Leonard said.

Collins said while many of these higher costs were already noted in the CPI, insurance premiums are now just catching up to reflect those costs.

"So they're not driving inflation. It's just a reflection of ... what cost consumers are facing," Collins said.