Why Is My Home Insurance So High?

The Days Ahead:

• Payrolls and job openings.

This Week:

• Home insurance costs haven’t risen as much as car insurance.
• But that’s because of bad regulation and denial of insurance.
• Insurance companies are also exiting states or bundling with other products.
• It’s a mess with California and Florida the main problems.
• Money market funds are at record levels.
• But not as a % of stock market value, deposits or GDP.
• They’re not a good predictor of stock market direction.

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So, Why Is My House Insurance So High?

Unlike car insurance, which we wrote about a few months ago, house insurance is complicated. The car insurance problem came down to a few obvious things like distracted drivers, new heavy trucks, electric vehicles, and labor and parts shortages. A nasty confluence of pressures meant car insurance rose 15% in 2022 and 19%  in 2023. In the last few months, it’s fallen to around an 11% increase.

Home insurance prices have risen less, by around 4% (blue line below).

The green line shows California house prices doubling since 2014. Insurance prices at the producer level are rising much faster, at around 11%. But those cover commercial as well as residential properties.

The price increase seems manageable except that home insurance, typically issued by property and casualty (P&C) companies, is all about excluding certain types of risk. That’s the same principle for life and auto insurance, but in both those cases, the risks are manageable. Life insurance requires a medical exam. Only the healthy apply. Auto insurance is mandatory, so the risk pool is large and diverse.

But average prices, unlike auto insurance, are a very poor guide of insurance costs, as any homeowner with beachside property or a house in a fire zone will tell you. For some policyholders, insurance prices will skyrocket or simply become unavailable. Rather than price at high levels, insurance companies leave the state or drop policies.

P&C companies know that homes in some locations are uninsurable and want nothing to do with them at any price. Homeowners can quickly find that they can no longer buy insurance.

Why?

Let’s look at Florida and California, which collect 17% of the country’s homeowner premium taxes but account for 33% of insurance losses, up from 12% in 2009.

1. Not Enough Building and Too Much Building

In Florida, homeowners build lots of houses in flood plains where a hurricane comes ripping through every 10 years. The losses are highly predictable and catastrophic. The only way to reduce the risk is to build fewer houses. Except Florida doesn’t do that. The Southern states of the U.S. account for 56% of all housing starts, up from 45% in 2000, and 60% of single-family houses. Florida builds 9.5 houses per 1,000 people, the second highest in the country after South Dakota. The more people build the higher the risk. Or, higher density means more risk.

In California, it’s the other way round. Wildfire risk is high with houses spread apart and lots of fuel, like grass and trees, around. The more houses are built and the more ground cleared, the lower the risk of fire spreading. But California has one of the lowest building permits issued per 1,000 people at 3.1. The total number of permits issued in California was 67,000 in a population of 40 million. Florida and Texas, with 45% and 25% fewer people, issued three times as many. In California, higher density means less risk.

2. Two Big State Problems

Florida and California are the insurance industry’s biggest problems, mainly because of the high incidence of risk from storms and wild fires but also because of arcane state regulations. You’d think that home insurance would be high in both states given the risks of fire and water damage. But the highest prices for home insurance, for say a $450,000 loss, are Oklahoma and Texas at $7,500 and $6,000 a year. California is $1,988 and Florida is $3,099. Both are way underpriced.

3. Nature of Property Insurance

Property insurance is about fire and weather damage. The average loss for both was around $84,000 from 2017 to 2021 and occurs about 6% of the time. The average theft insurance loss is $4,600 and occurs around 0.1% of the time. The main problem with property insurance is that insurance companies know a lot about where the property is and how it’s built. They know that once every few years, there will be catastrophic damage for which they simply cannot price. Flood insurance is a classic market failure in that no private company can afford the loss. Thus, the government steps in and is the only flood insurance provider.

In property insurance, location is the risk. If you live in a hurricane belt or near dried grasslands surrounded by a bunch of power lines, an insurance company is going to politely send you on your way.

4. Climate

In Florida, from 1980 to 2000 there were 25 weather or climate events costing more than $1 billion in losses. Since 2000, there have been 51. In the last four years, there have been 11. The total loss, adjusted for inflation over 43 years, was $400 billion of which $200 billion was in the last three years. In some locations like West Palm Beach (average elevation 13 feet) and Miami (six feet), insurance premiums went up by multiples of 10.

By comparison New York City is at 33 feet and Charleston SC is 19 feet.

Some 4.2 million Florida homes are at risk of flooding. There are no requirements for sellers to disclose whether a house is at risk of flood. Climate, hurricanes, water and elevation make some risks uninsurable and companies price them as such.

Over in California, between 2000 to 2010 the average number of fires annually was 8,100 and 680,000 acres destroyed. From 2017 to 2022 it was 8,652 and 1,852,100. Seven out of the top 10 fires in California history happened from 2018 to 2020 and destroyed 53,000 homes. Some 2.7 million people live in areas where there is a “very high fire hazard.”

5. Regulation

States regulate insurance company practices and prices. Every state is different. Eleven states elect insurance commissioners, including California. The rest are appointed by the Governor. Insurance regulators care about two things: prices and insurance company solvency. Most don’t want to see consumers pay more so they require a review and approval of any rate hikes. Some 38 states have “file and use” policies which mean insurance companies file and implement a rate increase that regulators may change. The others require an application and approval process.

California’s approval process takes at least 180 days. It also has Prop 103 from 1988. This does two things.

One, it creates a delay of up to two years. It allows anyone to intervene in the rate change process and “challenge any action of the commissioner.”

Two, it creates bad pricing. Prop 103 does not allow insurance companies to project wildfire losses. All they can do is show what they lost in the last 20 years and base price increases from there. Companies didn’t have models on how to project risk in 1988. They now have very good models on fire risk assessment using drones, computer simulation, thermal imaging and more knowledge on housing materials. But they cannot use such projections in pricing.

The delays and bad pricing mean that insurance companies now wait 308 days for approval for a rate increase, up from 151 days 10 years ago.

6. Reinsurance

The reinsurance companies, who take on excess risk exposure, however, can use all the data they want to project risk. They then pass on the prices to Allstate, Farmers, State Farm and every other company in the state. Those companies must absorb the higher reinsurance rates. They cannot pass them on because they are a projected, not actual, risk.  

Reinsurance is a very cyclical business. A few good years bring in competition and lower prices. A few bad years, especially coupled with low interest rates, bring sharp price increases. Here’s the return on equity of the two largest reinsurers. Returns are all over the place but took big hits from 2019 to 2022.

Reinsurers can charge P&C companies accordingly. But if the companies can’t pass on those price increases, they have little choice but to exit the lines of businesses.

What do consumers do? Well, many of them end up in the California Fair Access to Insurance Requirements (FAIR) plan, which is a government pool for those who can’t find insurance. The FAIR plan now has $311 billion in liabilities, up 27% since 2019, and 339,000 policies in force, up 113% over the same time. It doesn’t provide a full audit report but had a deficit of $332 million in 2022. Florida has a similar plan with Citizens. It insures 1.3 million people and lost $2.2 billion in 2022.  

But all that’s happened with FAIR and Citizens is that the risk is underpriced for insurance companies, and the government steps in with taxpayer funds to fill the hole. The risk does not go away. It passes from shareholders to taxpayers. What’s wrong with that? Well, only that the true insurance cost remains too low. People will carry on building on flood plains and in high fire risk areas. The costs will eventually come home to roost.

We don’t see any relief for home insurance costs for high-risk areas. The combination of regulation, climate, building practices and risk mitigation are a bad mix for a healthy market. The rest of the country will continue to see increases more in line with construction, material and housing prices of around 3% to 4%. But as long as the two big states underprice risk, the more likely we’ll see sudden price increases in coming years.

Money Market Funds and Stocks

One well-known Wall Street analyst observed this week that the increase in money market mutual fund (MMMF) assets was great for stocks because, well, that money needs to find a home and so why not into the stock market?

No, this isn’t how it works.

We’re as keen as the next person to find the one perfect measure to predict stock market gains but this ‘aint it. It’s correct that money funds are at a record high, here in the blue line.

They’re now at over $6,000 billion and ramped up quickly once rates started to move in 2023. But you know what else is at a record? The stock market, GDP, the number of people employed, bank deposits, wages and salaries, money in circulation and household net worth.

The green line tells the picture. MMMF are at 13% of the stock market’s value, which is way down from the Covid-19 era as well as the averages for the last 17 years. If we use other measures, like MMMF as percent of GDP or as percent of bank deposits, MMMF assets are not at record levels.

It’s not a good stock market indicator. MMMF assets were stuck between $2,700 and $2,900 billion from 2010 to 2020 and markets were sometimes up and sometimes down. But there was no relationship between the two.

What we think is happening is much simpler. Investors moved into MMMF from banks in 2023 because the average yield on a money fund rose from 1% to 5% while 1-Year bank CDs went from 0.6% to 2.6%. MMMF assets as a percent of bank deposits went up (see below) but it was more or less a straight swap out of one bank product into another “looks-like-a-bank” product.

At a very high conceptual level, liquidity helps stock markets. But the recent flow into MMMF is a substitution game and not any early indicator of stock market surges. We’ll keep looking for that one big stock market indicator but for now, it remains an illusion.

The Bottom Line

Most of the week had a “get me to Thursday” feel about it. There were some economic data like home sales and durable goods but they turned out to be in line and not tradable events. The PCE inflation number, which is a big deal is published on Friday but the bond market is closed.

GDP growth for Q4 2023 was revised up to 3.4% but that’s all rear view mirror at this point.

One fun fact is that the S&P 500, the S&P 500 Equal Weight, the Nikkei 225, the Toronto Stock Exchange and the German DAX equity markets are all at record highs. The last time that happened was in 1985.

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Art of the Week: Julie Mehretu (b. 1970)