What Goes Into the Price of Your Homeowner’s Insurance

According to a news post from the Dallas Morning News, homeowner’s insurance in Texas is the third highest in the nation. But why is homeowner’s insurance so expensive? The pricing of homeowner’s insurance comes from both risk factors and expenses incurred from normal operation. If insurance companies are paying out more money, you can bet your premium will be much higher because like any business, homeowner’s insurance companies are in the business to make a profit, and like any other business, they must recover any expenses in order to remain profitable.

 

There are actually many different risk factors that drive the price of homeowner’s insurance skyward, but I’ve chosen to write about five major factors. I list these factors in no particular order. The data comes from a document released by the Office of Public Insurance Counsel. They are as follows:

1. Inclement weather

Texas has seen its share of hurricanes, tornadoes, and severe storms over the past several years. In fact, my research turned up one particular storm covered by Insurance Journal from June of 2014 that caused $400 million worth of damage in Abilene, Texas. The city was hit by heavy rains, baseball sized hailstones, and cloud-to-ground lightning strikes. Other areas of Texas experienced tornadoes from the same storm. When it comes to inclement weather, Texas is an extreme risk factor for homeowner’s insurance companies (or any other insurance company really), and this will drive your premiums up.

2. High expenses

Like in any other business, insurance companies encounter expenses as part of daily operations. Commissions, general expenses such as electric and phone bills, cost of office equipment, dividends for investors and much more will very quickly eat away at an insurance company’s profit margin. Just writing up a homeowner’s policy costs more in Texas than in other states. Commissions are higher as well because in Texas, commissions are paid out based on a percentage of customer premiums.

3. Higher target profit margins

Target profit margins are what insurance companies hope to earn for a specific year. Actual profit margins can vary widely from an insurance company’s target. Many homeowner’s insurance companies invest much of their surplus in highly secure investments. However, companies have begun targeting higher profit margins largely because their returns on these investments have been shrinking in recent years, and thus are not as viable as they once were.

4. Homeowner’s insurance is an inefficient market

In an efficient market, one would expect that competing companies would offer their service at competitive rates (in essence, companies would compete by keeping prices as low as they possibly can without going bankrupt.) However, we have eight major corporations controlling a very large part of the market (as much as 76 percent), while others are struggling to gain ground against these “megacorporations”, as I like to call them. Furthermore, according to market reports, customers rarely “shop around” when buying homeowner’s insurance. This adds to the inefficiency of the market to some degree.

5. Increasing insurance fraud

According to a report from the Texas Department of Insurance (the data can be found on Page 12 of the document), insurance fraud claims have been steadily increasing between 1996 and 2013. That same report states that an estimated $71 million in fraud claims have been identified, and part of that cost has been passed on to policyholders in an effort to recover lost revenue from these insurance fraud cases.

Conclusion

These are five top factors that go into your homeowner’s insurance premiums. Hopefully, you understand a bit more about what you’re actually paying for.