By ALLEN MCQUISTON
Jemez Insurance Agency
Serving Los Alamos Since 1963

I am hearing scary high insurance rates are coming … 30%, 40%, even up to 50% price increases … on top of rate increases from 2023.

The reasons behind rising premiums are complex. They also relate to broad changes in underlying risk and how those risks affect the financial health of insurance companies.

There are three reasons why risks have changed:

• • • • The frequency and size of natural disaster losses are increasing.
      • The costs of building a home are going up.
      • Low housing inventory is causing home prices to rise dramatically.

1. Natural disasters are increasing

Damage from natural disasters is a leading cause of premium increases. Hurricanes, tornadoes, tropical storms, and wildfires are increasing in frequency and severity—and losses are skyrocketing. Another factor that makes the impact worse is an ongoing population shift. People have been moving to areas of the country that are more likely to have natural disasters. Wildfires have become more frequent in the Southwest, while hurricanes have been on the increase in the Southeast. Whether people move for work or businesses relocate for better conditions, growth in population means more infrastructure. However, when a disaster hits these areas after migration, the losses can be much greater.

2. Cost of replacement materials increased

Inflationary pressures and supply-chain issues also are contributing to insurance premium increases.  Most homes are insured at replacement cost, rather than their actual cash value. In fact, some insurers don’t even offer actual cash value as an option. When homeowners experience a total loss because of a covered event, they often want to rebuild their home close to what they had before.  A structure’s actual cash value is based on the depreciated value of the property. Age, wear, and tear are taken into account. Replacement cost coverage reimburses you at the rate things cost now. When put that way, it’s easy to understand why premiums are increasing. Whether it’s the lumber used to rebuild a home or the appliances that will fill it, the components used for construction have gone up in price. Rebuilding a house that is lost in a fire will cost substantially more now than it would have even a few years ago.

3. Rising housing prices

Another factor is the increasing demand for housing. There are several variables at play here, beyond the reduced availability of building materials covered above. Sometimes land scarcity is a factor, or perhaps there’s a shortage of existing houses that leaves buyers with little to choose from when they are looking for a home. Location is also an important factor in determining home insurance rates. This factor also impacts a rise in premiums. Labor is also in short supply. Almost every trade associated with building a home is experiencing shortages, from framing to drywall hanging to plumbing and painting. This impacts on the cost of building a home in a couple of ways.

First, salaries go up. This is yet another factor that increases the cost of a new home. I had some minor repairs to my home earlier this year and the labor cost was about 30% more than 2 years ago. Second, shortages slow the pace of construction. This puts additional pressure on the supply side of the equation. There simply aren’t enough workers in some areas of the country to keep up with the demand for homes.

Also keep in mind, if you need to live somewhere else while your home is being rebuilt, your insurance is going to cover the extra living expense. The cost of temporary housing has gone up over 25% in the last 2 years.

One other thing to keep in mind about insurance. It is reactionary. When inflation started to climb in 2021, insurance companies didn’t start to react and get pricing approval from the insurance commissioner until about 2022 and didn’t get to start increasing premiums until last year. They are still playing catch up to losses from 2022, 2023 and trying to predict losses in 2024.

Not a pretty picture, but one I want the residents of Los Alamos to be aware of.

For more helpful articles, visit us at www.thejemezagency.com.