Report: Home Insurance Market Faces Unprecedented Carrier Exits and Restrictions Amid Soaring Premiums

Introduction

The home insurance market is currently grappling with unparalleled volatility, marked by two prominent trends. 

1. Acquiring insurance has become increasingly difficult due to home insurance carriers implementing stringent restrictions on new business and rapidly exiting specific markets. 
2. The cost of home insurance, for both renewals and new business, is more expensive than ever as premiums are increasing at drastically high rates.

In this report, we dive into how we got here, the latest data to better understand the trends, and how this problem significantly impacts new homebuyers and mortgage lenders most significantly.

Unsustainable loss ratios are forcing carriers to make drastic changes

Property and casualty insurers have encountered significant obstacles arising from a surge in severe weather events and the escalation of building material prices. According to S&P Global Market Intelligence, P&C insurers in 2022 reached a combined ratio of a daunting 102.4%, underscoring a lack of profitability.  

In response to mounting losses, carriers are raising premiums for both renewal business and new business. However, securing approval from state regulators, commonly referred to as the Department of Insurance (DOI), is a requirement for implementing rate increases. In certain regions like California and New York, the DOI’s approval process has been slow, leading to prolonged waiting periods for proposed rate increases. In some cases, carriers in California have been waiting for approval on home insurance rate increases submitted as far back as six years ago.

Additionally, some states impose a cap on home insurance premium increases, making it challenging for insurers to keep pace with inflation and adequately cover their costs. These regulatory hurdles are adding complexity to the already challenging task of mitigating losses and ensuring financial stability for carriers in the property insurance sector.

Amidst the challenges of premium delays and denials, carriers are resorting to measures such as limiting or ceasing the writing of new policies in problematic regions. In the past year, a growing number of national carriers have enforced universal limitations on new home insurance policies. Some carriers have taken even more drastic measures by completely discontinuing the selling of new policies in specific states. While this trend has been a longstanding challenge in Florida, it is now beginning to impact other states like California, Georgia, South Carolina, New Jersey, New York, and Arizona.

As carriers implement more restrictive measures, an increasing number are discouraging or outright rejecting requests for new business to alleviate risk, leading to a noticeable rise in online quote declinations over the past year. These declinations present an additional obstacle for potential insurers, forcing them to work with licensed agents instead of securing policies directly online. Prior to the fall of 2022, declinations were relatively flat across the US, averaging around 18% between June 2019 through August 2022. However, in the fall of 2022, declinations began to climb and throughout 2023 have averaged 36%, reaching an all-time high of 44% in June. 

As a result, homeowners in the US experienced a significant reduction in policy options in 2023 compared to the previous year, with a 35% decrease in available policies per homeowner. The sharpest decline occurred in April when availability dropped by 14% compared to the previous month. To illustrate, a homeowner searching for coverage from 10 national carriers in March 2022 may have been eligible for an average of 6.08 home insurance policies, whereas in 2023, they would have only had access to an average of 2.87 policies, representing a substantial 53% decrease.

Premiums increase for both new and existing business at unprecedented rates

In regions where rate increases are approved, carriers may choose to continue selling new business while passing along significantly higher rates to new policyholders. A case in point is Texas, where the Texas Department of Insurance reports that 87% of property and casualty rate change requests were approved in 2022. As a result, Texas exhibited the second highest home insurance premium state increase across the US this year.  

During the first half of the year, premiums in Texas surged by an average of over 15% compared to 2022, driving the average annual cost to $2,143. In contrast, back in 2020, insurance premiums in Texas averaged $1,637.

Despite facing regulation delays and challenges in South Carolina and California, some carriers have received rate increase approvals, although not necessarily for the full requested increase. This has led to a mixture of new business restrictions, market exits, and rate increases in both regions. 

South Carolina experienced the highest year-over-year premium rate hikes in the country, bringing insurance premiums to an average $1,602, compared to $1,367 in 2022, marking a notable 17% increase. Meanwhile, California encountered the third highest premium rate change in the US, with rates rising nearly 14% year-over-year. Despite the substantial percentage increase, annual home insurance premiums in California average $1,267 in 2023, which is 16% lower than the national average annual home insurance premium of $1,473. 

Overall in the US, home insurance premiums have reached an unprecedented record high, averaging a nearly 9% increase during the first half of 2023 compared to the previous year. This marks a notable increase from the 5-6% rate of premium growth observed in 2021 and 2022. Prior to 2021, premium increases for new business had been more moderate, averaging between 2-4%.

Coverage A, also known as dwelling coverage, experienced a slight increase in 2023, but at a lesser rate compared to previous years. The steepest Coverage A increases were witnessed in 2021 and 2022, reaching around 10%, primarily driven by the escalating costs of building materials and skilled labor shortages. Moreover, the current record-high inflation rates are further contributing to the growing expenses associated with rebuilding a home.

 

Homeowners that stay with the same carrier and policy are experiencing an even steeper incline in renewal rate changes compared to new business. Nationally, renewal rate changes typically average 10-12%. However, in 2022, renewal rates began climbing, reaching nearly 19%. The trend continued in the first half of 2023, with renewal rates averaging 24%, equivalent to a substantial $326 increase. 

For instance, in 2019 a home insurance policy premium averaged $1,175. Over the years, this policy experienced gradual increases during the renewal period, culminating in a cost of approximately $1,700 in 2023 – a staggering 43% increase since 2019.

Challenges in the insurance market impacting mortgage lenders and homebuyers

The current insurance market is causing significant challenges for mortgage lenders and homebuyers, affecting the loan closing process due to product availability and pricing. In regions facing carrier exits and restrictions, the search for suitable home insurance policies has become lengthy and complex for homebuyers. Notably, the absence of fully online policy binding without agent involvement adds to customer service wait times, becoming a critical consideration for prospective buyers.

An illustrative example is State Farm’s exit from California, which led to a regional carrier in the state experiencing a staggering 500% surge in inbound calls. As a consequence, average wait times for existing and potential customers rose significantly, leading to delays in obtaining proof of insurance. Such complexities in the closing process can extend it by days or even weeks, resulting in escalated costs for mortgage lenders. Rate-lock extensions alone may cause lenders to lose tens of thousands of dollars per month.

Moreover, escalating insurance costs could potentially lead to mortgage denials during the underwriting process. Accurately calculating a customer’s front-end debt-to-income ratio (DTI) requires factoring in all housing expenses, including homeowners insurance premiums. Loan officers often encounter situations where a loan becomes unfeasible once insurance estimates are included, leading to potential loan rejections. The insurance landscape’s impact on the loan closing process demands close attention and strategic considerations from mortgage lenders to mitigate potential risks and challenges.

Conclusion

As large, mass market home insurance companies grapple with ongoing losses, their growth endeavors and expansion into new business will likely be put on hold. The profitability revealed in future filings will play a crucial role in determining carrier appetite and market direction. States that collaborate effectively with insurance companies can expect to maintain relatively healthy product availability with steeper premiums. Conversely, states with strained relationships may continue to face challenges in product availability.

Navigating these trends will demand careful consideration from both homeowners and mortgage lenders during the home buying process. Staying informed about the evolving insurance landscape and understanding the varying conditions across states will be essential for making well-informed decisions and securing the right insurance coverage for homes.

 

*Methodology: Home insurance premiums and Coverage A data is based on an average from a random sample of 9 million quoted and Matic insured properties analyzed from June 1, 2018 through June 30, 2023. Declination and policy availability is gathered from 30 million quote requests to Matic, 3rd party quoting engines, and carrier direct quotes. 

 

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