Sean Kevelighan from the Insurance Information Institute explains why homeowner insurance rates are rising,  even with a lack of major hurricane landfalls so far this season.

Homeowner insurance rates in the United States continue to rise, despite a lack of landfalling hurricanes this season. According to Shawn Kevelighan, CEO of the Insurance Information Institute, the increase is due to a combination of short-term and long-term factors. In the short term, inflation has significantly raised the cost of replacing homes, with replacement costs rising by nearly 30% over five years. Legal system abuse, where litigation is increasingly used as a first resort, has also added to costs.

In the longer term, the frequency and severity of natural disasters, such as wildfires and flooding, have led to record-breaking losses for insurers. Regulatory environments in certain states, like California, have made it difficult for insurers to remain, while legal reforms in states like Florida have helped stabilize markets. Insurers use a range of variables to set rates, including inflation, catastrophe risk, and individual credit, working closely with regulators to ensure fair pricing.

Why insurance rates keep climbing

While the hurricane season is not over yet, we have not had a landfalling name storm, well, hurricane certainly, along the United States, but homeowner insurance rates are still rising. The first half of the year brought billion-dollar disasters from wildfires in LA to deadly flooding in many other states. Here with more on how weather disasters can impact your rates is Shawn Kevalian, CEO of the Insurance Information Institute. Thank you for being with us. Sorry if that did not come out the way it actually sounds. I have no pride in pronunciation on that last name, so no worries. Thanks for having me. No problem. All right. I appreciate the humor with that. All right. Even with the lack of landfalling hurricanes this season in the US, why are some homeowner insurance rates continuing to rise nationwide? Well, I think it's important to look at both the short and longer-term trends that we're experiencing. In the short term, especially coming out of COVID, we saw extraordinary inflation. In fact, for the replacement costs in terms of what needs to be the cost covered for claims, we saw homeowner's insurance replacement costs on average go up close to 30% on inflation over the last five years, auto, very similar. We've seen inflation. Now we're also, as we're getting back to normal inflation rates, we're now seeing some tariff pressure as well happening, not as much as COVID, but certainly some pressure happening. On top of all that, over the last 10 years in particular, you've seen extraordinary legal system abuse. Americans are going to litigation first instead of a last resort, and that is driving up costs for everyone. And then if you switch to the longer term, what you have are natural catastrophe losses. As you mentioned earlier in the opening of the show, we've seen multibillion-dollar events. In fact, this year we've seen $14 billion plus natural catastrophe events already. We're in the midst of hurricane season still, and while we haven't seen landfall, as you notice, we still need to get through hurricane season to see where we're going to end up. But regardless, we'll probably see another year of $100 billion in natural catastrophe losses. That's up tenfold since the 80s. So you've got a variety of circumstances that are impacting everyone in terms of insurance costs, because that's the price of risk these days. And how do events like the Los Angeles wildfires, spring storms, and flooding contribute to overall home insurance costs? Well, overall, the industry average did spike in the first quarter as a result of the California wildfires. In fact, what we call the combined ratio, which is the expenses we pay out versus the premiums we take in, for every dollar premium we took in, we paid $1.11 in expenses, and that is in large part due to the California wildfires. So that's a record for first-quarter losses in our history tracking, so certainly we've seen some impact there. How do insurers plan and price for future disasters? What variables go into setting these rates? Well, there are a variety of variables. A lot of the variables I talked about early on about inflation and tariffs and legal system abuse and natural catastrophe losses, those are all variables that are used for pricing. But what we call risk-based pricing also includes things like credit, which is an important correlation to how an individual manages its risk. So we have a variety, and every insurer uses different variables to price their risk, and then they transfer that pricing mechanism over to the regulator to help them understand how they're getting to the various pricing. So it's a work done hand-in-hand with the regulatory bodies to ensure that all pricing is fair and transparent. Now some insurance companies are leaving states like Florida and California. How can homeowners find coverage and keep their premiums manageable? Well, what's interesting actually, when you mention Florida and California, Florida has actually seen over the last three years nearly 20 new insurance companies returning to that state. That's in large part because they had legal reform. Three plus years ago, more than 70% of all homeowners litigation resided in the state of Florida for the entire country, even though that state only had about 15% of the claims. Now that they've had reform, we're seeing insurers go back, we're seeing that market stabilize. In fact, we just had one insurance company announce a billion dollar refund to consumers in the state of Florida. California is different. California has some regulatory troubles, I would call them, where they don't allow the actual rate to be applied. The insurer just can't get the rate it needs because of regulatory restrictions. And as a result, insurers are making what they would call an unfortunate decision to have to withdraw from that state. Insurance thrives on big economies. And when you see a state like California, one of the largest economies, not just in the United States, but the world, having insurers withdraw, there's something wrong there. And we would say that what's been wrong for many years is the regulatory restriction, the regulatory environment, because that simply, you have many other states out there that have a very healthy insurance market. For example, the state of Illinois has a healthy insurance market. So you need to kind of understand the differences between states. But certainly, when you get the regulatory restrictions or an abundance of legal litigation, legal system abuse in a state, those have a severe impact on insurance pricing and the insurer's decision to have to stay in the state. Sean Cavaliere, the CEO of the Insurance Information Institute. I've learned so much, and now I have such an interest in insurance. And I think a lot of people now realize, okay, something can happen elsewhere in the country, but you're impacted. So thank you so much for joining us and educating us today on AccuWeather Early. Thanks so much.

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