MALVERN, PA — The increasing frequency and severity of natural disasters, coupled with escalating home repair costs and other economic factors, are making homeowners insurance less affordable, according to a recent Research Brief released by the Insurance Research Council (IRC), an affiliate of The Institutes.
The IRC measures affordability using the ratio of average homeowners insurance expenditures to median household income. For 2020, the most recent year for which data is available, this ratio sat at 1.93 percent, meaning U.S. households spent an average of 1.93 percent of their income on homeowners insurance.
Homeowners insurance was most affordable in Utah, where households spent just 0.92 percent of their annual income on such insurance in 2020. Other states with low expenditure-to-income ratios included Oregon, Wisconsin, Washington, and New Hampshire. Conversely, the least affordable states were Louisiana (3.84 percent), Florida, Oklahoma, Mississippi, and Alabama.
The affordability of homeowners insurance is primarily determined by cost drivers, which can differ from state to state. These factors include the number of claims paid, average claim payment, risks from weather and other natural hazards, and other perils covered by a home insurance policy, such as losses due to theft and vandalism. Additional cost pressures come from the amount insurers spend to process, investigate, and litigate claims, as well as the percentage of homeowners claims with litigation.
These cost driver trends have led to less affordable homeowners insurance nationwide, as average premiums have grown faster than personal income over the past two decades. The expenditure share of income averaged 1.54 percent in the 2000s before rising to an average of 1.99 percent in the 2010s. This measure dropped slightly in 2019 and 2020, but the current data does not address the more recent increases in insurance costs. In some states, the declining affordability has been accompanied by crises in availability, as some insurers have reduced their exposure or withdrawn from specific markets entirely.
“By examining what’s driving up the cost of claims, insurers and policymakers can identify opportunities for improving both the affordability and availability of homeowners insurance nationwide,” said Dale Porfilio, president, IRC. He added that insurers must be able to price their policies to reflect the risks they’re assuming.
The IRC’s analysis focuses on the affordability of homeowners insurance for the overall population and does not address the issue of affordability for specific demographic or geographic risk profiles. These data also exclude flood and earthquake insurance, which are not part of standard homeowners policies.
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