Over the last few weeks the single most asked question when we chat with real life Texans is why in the world is my home, auto, business, or fill in the blank insurance going through the roof just like everything else. Yes, it's tied into the inflationary aspects that you're seeing all over the place. But it's affecting property insurance and auto insurance in some very specific ways. We never want our friends and neighbors to feel like they are being taken advantage of by the big insurance companies, so let's take a look at the specifics of what is going on with inflation pushing insurance costs higher.
When it is all said and done, there is one overriding thing that determines how much insurance premium that you pay to the insurance company. And that single item is how many dollars the company pays out in the form of claims. The more claims that get paid in a city/county/state, the more money that all of the people buying insurance that area will pay. It's pretty simple math and Texas, North Texas especially, has been experiencing this phenomenon pushing premiums up for several years. Which brings us to the question of why are insurance premium increases so chaotic in Texas right now?
The Answer To This Question Has Three Parts
Part Number One: Claim Frequency
Do you remember the refund that you got from your auto insurance rates during the COVID-19 Pandemic lockdown when no one was driving? Those refunds were issued because the auto insurance premiums paid were based on people travelling to and from work five days a week. Since that wasn't happening, they were overcharging you. Since the world has opened back up, people are driving as much or more than they were pre-pandemic. And to be frank, they are not driving as cautious as they were previously which is resulting in far more accidents. So it only makes sense to realize that premiums are going to go back up with the uptick in claims.
In the same vein, we have seen more weather related events over the last few years which is causing more claims against property like homes and office buildings.
- The freeze event in 2021 that stretched from Texline to McAllen and El Paso to Beaumont caused a massive uptick in water related claims.
- As the housing explosion has happened between Dallas and The Red River, we have seen an explosion of hail related claims on those new properties that were not happening in prior years.
- The drought has produced more wildfires in West Texas and The Hill Country which has caused more fire claims against homes.
- Hurricane season has seen more named storms touching the Texas Coast over the last five years. This has resulted in an increase in claim activity with both homes and businesses.
The weather in Texas has always been a bit wacky. But with the uptick in people living here and the increase of events described, it becomes easier to understand why an increase in claim activity is creating an increase in premium claims. Even if we don't like it.
Part Number Two: Inflation Pressures
Texans of all stripes have all heard the stories and lived the harsh reality of the effects of inflation on our everyday life. The claims paid by your insurance company are not going to be immune from this problem. Have you celebrated that your car in the driveway is actually worth more today than what you paid for it? We certainly have on our end. Have you celebrated that your home has appreciated in value in the last 24 months? It's been a good run. The downside to these increases in value is that the cost to repair or replace those items has gone through the roof for your insurance company.
The news stories about lumber prices going through the roof, supply chain disruptions for car microchips, labor shortages for producing shingles, and supply chain issues for materials and parts in general are having a profound effect on how much money it takes to meet the cost of repairs or replacement costs. At a micro-level, a fence to be replaced at an average home cost $4,000 to $6,000 eighteen months ago and will now run upwards of $8,000. The material cost on a roof that ran a Texas homeowner $14,000 to replace previously is pushing $20,000. For business owners looking at replacing a large building, the amount of money required in construction materials caused by this inflation factor is through the roof. All of this factors into how much the average cost is on claims paid by the insurance carrier. These kinds of increases are unsustainable for the insurance industry to keep annual premiums relatively flat for your insurance policy.
It's easy to pick on the material costs as that is easy to spot on Texas homeowner pocketbooks, but the labor costs associated with these activities is important to note as well. The price of labor is well above pre-pandemic levels and doesn't look to be returning any time soon with a shortage on the labor front. Since labor costs are as big a factor on construction costs as the cost of materials, it is easy to see why it feels like the inflation rate of insurance coverage premiums is outpacing even the pace of other costs. All of this is producing the rate chaos that Texans are seeing on their annual premium.
Part Number Three: Interest Rates
The third main driver of the premium increases that Texans are seeing is a bit more complex. In the current financial market environment we are seeing interest rate increases on bonds. Insurance companies love safer investments to make money over time to help make them profitable. High quality bonds are one of the safest investment vehicles that they can hold, so they use them regularly. As the interest rates increase, the value of their bond portfolios decrease making it harder to make money on shorter term investments. As a result, insurance companies have a tendency to tighten the belt on everything. One of the levers that they can tighten to make sure that they remain profitable is to file for rate increases to improve their loss ratios. As a result, this financial market problem gets passed on to the consumer unfortunately.
What Can A Texan Do?
When it's all said and done, you are going to pay more in insurance premiums this year. The key is whether your price increases include all of the coverage that you truly need. You will want to work with a local, independent insurance agent who is as worried about having proper coverage limits in place as they are about saving you a handful of dollars a month. It can become easy to fixate on saving money and lose sight of knowing whether or not your potential claim will be covered. This means making sure that your replacement cost calculations are keeping pace with inflation for your square footage and construction costs. It means that you have the proper amounts of coverage for repair costs. The cold hard reality is that you buy insurance to put your life back together when calamity strikes, and stripping away coverage eats away at the ability to do that. Premium rates do matter, but repairs matter more.
The agents at Insurance For Texans work with you to make sure that your property is correct coverage limits whether that be on a Commercial Policy or using our TRUE Texas Home Insurance. You can sleep well at night knowing that we have Texans' backs when it comes to claim costs. Texans who choose to obtain their insurance coverage with Insurance For Texans do so with neighbors who live here, work here, and work for Texans and not some large corporation from somewhere else. Since we have options to shop across the marketplace, you know that your proper coverage limits are at a great place.
Ron Wadley is an owner and General Solver of Problems for Insurance For Texans. Ron is a resident of North-East Tarrant County in the Dallas-Ft Worth area. He loves riding his many bikes and watching his Baylor Bears play football and basketball. Send him your insurance questions at ron@insurancefortexans.com.