Edward Conard

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  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
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Upside of Inequality Oxford Unintended Consequences

AI Summary. Homeowners insurance costs have risen steadily and substantially since the 1970s across essentially every US state, with construction cost inflation, larger homes, insurer profits, and population shifts explaining little of the increase. The largest driver of rising expected losses over the past two decades is the increasing severity and frequency of water damage rather than climate-related events.

Brian Potter Construction Physics
Date Posted:

.@_brianpotter argues that an increase in claims for water damage and freezing is responsible for ~75% of the rise in expected annual homeowners insurance payouts since 2005. This excluded flood damage, which is typically not covered.

What is driving the long-run rise in homeowners insurance costs?

Core argument: The increasing severity and frequency of water damage, rather than anything climate-related, is by far the biggest driver of rising homeowners insurance expected losses over the past two decades, for reasons that remain unclear.

Homeowners insurance costs have risen steadily and substantially since the 1970s. Construction cost inflation and increasing home size can probably only explain a small portion of the increase. Insurers’ profits don’t seem to be a driver, and neither does state-level population shifts: the cost increases are across the board, in essentially every state. Increasingly destructive weather events and climate-related disasters are probably part of the explanation, with the cost in risky regions being spread over the rest of the country, but it’s hard to tell how much this is occurring. Over the past two decades, by far the biggest driver of rising homeowners insurance expected losses isn’t anything climate-related, but is instead due to the increasing severity and frequency of water damage. But it’s unclear to me why this is occurring, and to what extent whatever’s behind it can explain increasing severity of other sorts of claims (fire, hail, wind, etc.)

Takeaways by Macro Roundup® AI

  1. The increasing severity and frequency of water damage, rather than anything climate-related, is by far the biggest driver of rising homeowners insurance expected losses over the past two decades, for reasons that remain unclear.
  2. Homeowners insurance costs have risen steadily and substantially since the 1970s in essentially every state, which argues against state-level population shifts as a driver, while construction cost inflation and larger homes probably explain only a small portion.
  3. Insurers' profits do not appear to drive rising homeowners insurance costs, while increasingly destructive weather events and climate-related disasters are probably part of the explanation, with costs in risky regions spread over the rest of the country.

Related Articles:

  • The World Is Getting Riskier. Americans Don’t Want to Pay for It — Americans' resistance to paying to insure against risks from illness, old age, and natural and financial disasters is growing alongside those risks; JPMorgan estimated wildfires around Los Angeles caused $50bn in losses, of which only $20bn were insured. Socializing risk removes the price signal that encourages the insured to mitigate their own exposure.
  • More Americans, Risking Ruin, Drop Their Home Insurance — U.S. Treasury Department data covering 246m home insurance policies from 330 insurers show that homeowners in areas most exposed to climate disasters are increasingly dropping coverage by failing to pay premiums. In more than 150 ZIP codes, insurers canceled at least 10% of home insurance policies for nonpayment.
  • Why Has Construction Productivity Stagnated? The Role of Land-Use Regulation — Homes built per construction worker boomed after World War II and fell after 1970, a decline the authors link to local land-use regulation that limits project size and keeps construction firms small and less productive. They estimate US residential builders would be roughly 60% more productive if their size distribution matched manufacturing.
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