If you are a homeowner, chances are very good that you understand the benefits of home insurance especially on Long Island where the home values are relatively high. But chances are also very good that you are irked by the fact that insurance rates typically increase year after year. Are there any valid reasons for that, or are these guys just raising prices because they want bigger bonuses?
It turns out there are quite a few reasons why home insurance rates increase regularly. Some of them you probably already know about, while others might come as a surprise. To find out more, continue reading.
1. Increases in replacement cost
Inflation could well be the main culprit behind that annual increase in home insurance rates. Your home insurance policy typically covers the replacement cost of the property. And inflation makes sure that this amount increases every year. So if your home is completely destroyed by an event covered in the policy, the insurance firm will have to pay out more. You will see the value of your Coverage A Dwelling value increase each year typically by 2-4%. Since you are actually insuring a higher value, you will see some additional premium to cover that larger exposure..
2. Internal cost increases
Your insurer can obviously not operate at a loss. Inflation sees to it that its internal costs, such as salaries and wages, go up regularly. Since the bulk of its income is generated by insurance premiums, it can only recover these costs by increasing the yearly amount of these premiums.
3. Your claims history changed
This is actually the first place to look when trying to find out why your insurance rates went up. Even a small claim can stay on your record for a long time and cause significant increases in premiums. If you recently filed a claim for water damage, fire, liability, a dog bite, or theft you can be virtually certain it affected your risk profile and therefore also your insurance cost.
4. Extreme weather events
The number of hurricanes, windstorms, wildfires, and tornadoes have risen significantly over the last few years. This has resulted in an increased number of claims and insurance firms have no choice but to hike their premiums to stay in business.
5. An increase in your local crime rate
When your home insurer calculates your premiums, it will consider the crime rate in your area. The higher the crime rate, the more you will pay. And if the crime rate goes up during a specific year, you can expect an increase in your insurance rates the next year.
6. You made major home improvements
Home improvements increase the risk for the insurance company. Let’s say you replace your old particle board cabinets with custom cherrywood cabinets, That makes the cost of replacing them a lot higher if you should have a claim. So expect an increase in your home insurance premiums.
7. Nearly your whole town signed up with the same insurance company
You might think your insurer will be happy if you convince nearly everyone in town to sign up for one of its homeowner policies. Not so. If an insurance firm over time finds itself insuring a large percentage of properties in a specific area, it might have no choice but to increase its premiums. Why? It’s actually very simple: one fire, flood or hurricane can destroy nearly all those homes. This could potentially bankrupt the insurance firm. So it would typically start increasing insurance premiums aggressively until - you guessed it - enough policyholders from that area switch to another carrier, and the risk profile for the area returns to normal.
Your homeowners insurance company calculates its annual premiums based on the number and amount of expected claims. But predicting the future remains riddled with uncertainties. Sometimes it will receive more claims than expected, so it has to cover those losses by increasing the premiums. The same can happen if a new insurer recently entered the area. This can cause a price war, with insurance premiums dropping until they are too low to cover the associated risks. The only way out is an increase in rates.