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Rising Costs: Why Home Insurance Increases Every Year

Home insurance is an essential protection for homeowners to safeguard their property and possessions. However, many homeowners are left perplexed when they see their insurance premiums increasing year after year. It’s time to shed light on the reasons behind these annual increases and provide practical tips to help you mitigate rising costs. By understanding the factors influencing home insurance premiums, you can make informed decisions to optimize your coverage and reduce expenses.

Increased Construction and Material Costs

One driver of rising home insurance premiums is the escalating costs of construction materials and labour. As the expense of building or repairing homes surges, insurance companies adjust their premiums accordingly to be able to continue to pay out losses without suffering financially. The cost of materials and labour has notably increased in recent years due to factors such as skilled labour shortages, changes in labour rates, and supply chain disruptions affecting the construction sector.

For instance, the average cost of building a home in Saskatoon ranges from $150 to $275 per square foot, depending on factors like land location, home size, design, and materials used. These substantial expenses inevitably impact the insurance coverage required to protect these valuable assets. Construction costs can also affect your insurance premium with the value of your dwelling rebuild value. According to IKW Homes LTD’s article on “The Cost of Building a Home in Saskatoon,

Home size and design as every small detail will affect the construction costs of your new home. The number of bedrooms, the architectural style, layout, square footage, and interior finishes, all affect the total cost to build… The materials you decide to use in your home have a significant impact on the overall construction cost. In the past few years, the cost of materials has increased due to supply chain issues, demand, and inflation.

This is true for new builds and older homes, as your rebuild cost is based on the total cost to tear down the entire dwelling rebuild from the ground up to the exact specifications of your current home. In addition, insurance policies will include what’s called inflation protection for policy renewals. What inflation protection does is increase your home’s rebuild value by a certain percentage (it varies among insurers) every year to stay current with the costs of materials and labour to help ensure you’re never underinsured.

Rising Claims and Loss Ratios

Another significant factor contributing to the annual increase in home insurance premiums is the upward trend in claims and loss ratios. As insurance companies face an influx of claims, resulting in higher payouts and subsequent premium adjustments. The personal lines sector is expected to improve in 2023 with pricing and underwriting adjustments, but the normalization of insured catastrophe losses may vary among insurers. For example, SGI Canada reported that in mid-summer 2023, they experienced increased claim costs across commercial and personal product lines, leading to a higher loss ratio than the previous year. This rise in claims can directly impact the premium rates for policyholders across product lines as the insurers struggle to balance having affordable premiums and still remain solvent to continue paying claims.

Looking at the current year compared to 2022, catastrophe claim costs increased from $9.0 million in 2022 to $12.6 million in 2023.

Climate Change and Increased Natural Disasters

Climate change is an undeniable reality with far-reaching consequences, including the alarming increase in natural disasters such as hurricanes, floods, and wildfires. As these catastrophic events become more frequent and severe, insurance companies face a surge in claims, resulting in higher premiums for homeowners residing in disaster-prone areas. In 2022, Saskatchewan experienced intense snowstorms, heavy rainfall, and an increased number of tornadoes:

Snow: We experienced multiple rounds of intense snowstorms in 2022, impacting southeastern Saskatchewan in April. One notable storm, occurring during the week of April 11, was labelled as “historic” by meteorologists. It deposited an estimated 50 centimetres of snow in areas like Moosomin and brought strong winds ranging from 70 to 90 kilometres per hour, resulting in blizzard-like conditions and the closure of highways.
In mid-June, the exceptionally dry western half of the province experienced heavy rainfall. North Battleford received nearly 100 millimetres of rain within less than 24 hours, surpassing the previous one-day rainfall record of 92.7 mm set in 1965. Additionally, parts of Saskatoon received 75 mm of rain in just a few hours, leading to basement flooding and a test of a newly constructed storm retention pond.
In terms of wildfires, the province reported a total of 454 cases in 2022, slightly above the five-year average of 382.
The province also witnessed an increase in thunderstorms and tornadoes, with 25 tornadoes touching down across the region. This represents the highest number since 2012, as the province typically averages around 17 yearly tornadoes.
Wildfires in 2023 amounted to 5x the size of P.A. National Park, equalling to 1.9 million hectares. The province saw a total of 494 fires, a 23% increase over the five-year average of 378.

The weather-related losses in 2023 have been unprecedented, with at least 23 catastrophic losses recorded in Canada, surpassing the previous record set in 2022. Insurance companies factor in these climate-related risks when determining home insurance premiums, thereby reflecting the potential financial impact of such events.

Market Trends and Competition

Market trends and competition also play a significant role in the annual increase of home insurance premiums. Insurance companies strive to maintain profitability while remaining competitive in the market, often necessitating adjustments in premium rates. Data from tech vendor Applied Systems reveals that auto and homeowner premiums have been rising year-over-year in all provinces, indicating sustained market conditions in personal lines across Canada.

In personal property, year-over-year increases ranged from a low of 1% in Alberta to a high of 11.1% in Quebec. The Atlantic provinces saw a 10.2% increase while B.C. saw a 10.1% increase. Ontario, Saskatchewan and Manitoba all saw a 7.5% increase.

Various factors contribute to these increases, including increased catastrophe activity and insured losses from severe weather events. As mentioned above, weather-related losses for 2023 have already surpassed 2022, and the year isn’t even finished yet. Catastrophe Indices and Quantification Inc. (CatIQ) recently told Canadian Underwriter that insured losses from severe weather events have already topped $3 billion this year. However, understanding these market dynamics can empower homeowners to make informed choices when selecting insurance providers.

Tips for Reducing Home Insurance Costs

To navigate through the maze of rising home insurance costs, it is crucial to have a comprehensive understanding of your policy. Familiarize yourself with the coverage limits, deductibles, and exclusions specified in your insurance contract. By doing so, you gain insights into the specific areas of coverage that impact your premium rates. Additionally, exploring the possibility of increasing your deductible can potentially reduce your premiums. However, it is essential to evaluate the trade-offs between cost savings and the level of coverage provided by your policy.

Beyond understanding your policy, several proactive steps can help you effectively reduce your home insurance costs. Implementing security systems or water prevention devices can lower the risk of damage or loss, thereby resulting in lower premiums. Insurance companies often reward homeowners who take measures to mitigate risks. Improving your credit score can also positively influence your premiums, as individuals with better credit scores are deemed less risky to insure.

Lastly, obtaining quotes from multiple insurance providers allows you to compare coverage options, leverage competitive pricing, and find the best deal tailored to your needs. Working with a broker is an excellent way to obtain multiple quotes quickly, as they can approach insurers on your behalf and make the process easier for you.

The annual increase in home insurance premiums can be attributed to various factors, including rising construction costs, increased claims and loss ratios, climate change, and market trends. However, armed with knowledge and understanding, homeowners can take proactive steps to manage and reduce their insurance costs. By comprehensively assessing their policies, implementing risk-mitigation measures, and exploring competitive options, homeowners can strike a balance between comprehensive coverage and affordable premiums. Remember, staying informed and proactive is key to navigating the dynamic landscape of home insurance and ensuring the protection of your most valuable asset—your home.

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