For most new mortgages, homeowners’ insurance (“HOI”) premiums impact the monthly payment and the cash required to close the loan. Most monthly mortgage payments include an escrow component covering 1/12th of the annual HOI premium (plus property taxes). Mortgages with escrow accounts also require payment of one year’s worth of premium plus a few additional months of HOI prepayment at closing. (The only way to avoid escrow is to obtain a conventional loan and make more than a 20% down payment.) HOI premiums have been rising rapidly in recent years, and the increased costs impact the home buyer’s ability to qualify for loan approval.
A recent Wall Street Journal article discussed how reinsurance costs have pushed HOI premiums higher and how new developments might slow the rise of HOI premiums. Insurance companies buy reinsurance policies to limit their own exposure and spread the risk of catastrophes to the reinsurance firms. By spreading the risk, the insurance companies seek to avoid being wiped out financially by a natural disaster in high-risk areas. In recent years, reinsurance firms suffered a significant drop in profits, so they raised their fees and reduced their coverages in early 2023. Home insurance companies responded by raising premiums and reducing coverage offered to property owners. Some insurance companies have retreated from disaster-prone areas, for example, Houston, TX.
The Georgia Insurance Commission has approved insurance rate increases of between 15% – 20%. Homeowners in other states have seen even larger premium hikes.
In late 2022, many reinsurance firms raised their thresholds for paying losses and reduced coverage for specific risks like thunderstorms. This moved the risk of frequent storm damage risks and wildfire risks back to the primary insurers. Facing these higher risks, the primary insurers reduced coverage, pulled out of damage-prone areas, and increased premiums they charge to homeowners. The article notes that last year, the insurance industry lost 11 cents for every dollar of HOI premium written.
While the primary insurers lost money, 2023 saw the reinsurance companies return to profitability. The hope is that with this return to profitability, the reinsurers will limit their cost increases to the primary insurers, hopefully lessening the premium increases paid by homeowners. In addition, new investor money is coming to the reinsurance industry, creating hope of lower reinsurance costs which could help homeowners.
Some consumer advocates are asking for a federal reinsurance program to limit reinsurance cost increases. They complain that reinsurers’ recent higher profits create a financial burden on homeowners. Reinsurance industry leaders believe that increased losses from storm damage are the main driver of premium increases.
Considering a home purchase in Georgia? You will probably want to get multiple HOI quotes. Be sure to look at the coverage levels and limits – don’t just consider the premiums. You want to be sure you have adequate coverage should a crisis hit. Give me a call to discuss loan options and we can discuss more about how your HOI premium impacts your mortgage. I’ll help you navigate all the details and win you a competitive interest rate on your new mortgage.
