P R O P E R T Y / C A S U A L T Y F O C U S

Trends in Home Ownership Affect Insurance Costs

By Janet, E.H. Wright, ABC, APR

Fueled by low mortgage rates, new housing construction is booming at the same time housing costs are soaring. Meantime, the home improvement business has never been as profitable as other segments of the housing market rehab existing homes in lieu of paying skyrocketing prices for new homes. Property is increasingly the investment vehicle of choice in these tumultuous financial times following 9/11. The trend of people moving from renting to buying is gaining momentum.

From Rent to Own

Although new construction of rental property is increasing, the rental vacancy rate has also increased slightly during the first quarter of 2005. In the meantime, home ownership rates continue to climb. According to the U.S. Census Bureau, the number of homeowners has increased at the rate of three percent between 1995 and 2003, while the number of renters decreased three percent.

The National Association of Realtors reports that existing home sales are forecast to rise 1.6 percent to a total of 6.89 million this year from a record 6.78 million in 2004, while new home sales are seen to grow by 3.2 percent to 1.24 million in 2005. At the same time, housing starts are projected to increase 3.4 percent to just over 2.02 million units, the highest level since 1973.

Such favorable housing market conditions mean there are opportunities for young households to make the transition from renting to owning, while owners of existing properties will generally find a ready market to sell their homes in order to make their next purchase. Opportunities are aplenty for former renters/first-time home buyers.

Insurance Costs Reflect Home Ownership Trends

The Insurance Information Institute (I.I.I.) states that average homeowners insurance premiums jumped 26 percent from 1996 to 2002, while average renters insurance premiums jumped 10 percent in the same period. However, the cost of insuring homes in 2005 is expected to rise by 2.5 percent – the smallest increase in six years. The average cost of $677 for homeowners insurance in 2005 is only $17 more than 2004’s cost of $660.

Robert Hartwig, senior vice president and chief economist for the I.I.I., offers a possible reason. “Small decreases in the frequency and cost of claims have helped improve insurer financial performance, resulting in a continuing moderation in the cost of homeowners insurance in 2005.”

“With the cost of owning a home in America skyrocketing – sale prices, local property and school taxes, energy costs and now, interest rates on the rise, the moderation in home insurance costs couldn’t come at a better time for homeowners,” says Hartwig.

Insurance Costs Governed by Value and Loss

Buying choices of consumers themselves have contributed to the increase in insurance cost. Taking advantage of near-record low interest rates, millions traded up for larger or newer homes, made additions or improvements to existing homes and joined the ranks of homeowners for the first time. Insurance premium volume rises with both the rate of home buying and the cost to properly insure bigger, newer and upgraded homes. Homeowners need to take these added costs into consideration when buying or increasing policy limits, to avoid being underinsured.

“Insurers are now protecting more homes at greater value than at any time in history,” Hartwig observes. “Helping propel the homeownership rate to an all-time high of 69.2 percent in the fourth quarter of 2004.”

Losses, of course, are the most important driver of homeowners insurance premiums. The severity of catastrophes increased dramatically during the 1990s, when insurers paid out nearly $150 billion in catastrophe-related losses. Events like the Northridge earthquake and Hurricane Andrew – still the most expensive natural disaster in history – are well-known in the annals of insured losses. Tropical storms, tornados, wildfires, hail, freezing and other severe winter weather problems have been just as catastrophic.

A new loss record of $27.3 billion was set in 2004 with the quartet of Hurricanes Charley, Frances, Ivan and Jean accounting for 83 percent of all catastrophe losses that year. As Tropical Storm Arlene opened the 2005 hurricane season with a wet roar, an even more violent year is predicted.

That prospect of potential loss with the proliferation of new building and expensively updated homes, makes communicating the message of insurance to value especially important for companies and agents With an increased number of first-time homeowners, who may be unaccustomed to thinking in terms of protecting both contents and structure, this communication job is even more essential.

Posted: Friday, August 19, 2005 12:00:00 AM. Modified: Friday, August 19, 2005 4:07:41 PM.

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