Safe Haven: Home Insurance Rates Up, Companies Cracking Down

Home insurance rates are on the rise, and homebuyers are feeling the effects, said Dennis Adkins, owner of Adkins & Associates Real Estate in Little Rock.

“The rates have gone up drastically on single-family residences. They’ve gone up on the condos that we sell,” he said. “We’re seeing big increases.”

Dennis Adkins

Insurance companies are also becoming more stringent, he said, adding that homebuyers might be denied coverage due to outdated wiring or an old roof, and some companies ask that trees be trimmed or removed before a home can be insured.

Nonetheless, home insurance is a necessity most every homeowner must consider.

“The mortgage companies will not make you a loan if you don’t have the home insured … and then if you did have a buyer that was paying cash, they would be a fool not to have insurance,” Adkins said. “You could ask some of the people that were in Walnut Valley [in Little Rock] that had their homes paid for, didn’t have insurance, and then they lost everything when the tornado hit last year.”

WHY DID RATES INCREASE?

Severe weather events such as the March 2023 tornados are partly to blame for increased rates.

“One of the problems that we as Arkansans are experiencing over the past couple of years — and it’s not getting any better — is insurance on our homes and our business operations because of the storms, the tornadoes, high straight-line winds and the hail,” said Matt Cashion, president of the Cashion Co. Insurance and Bonds in Little Rock. “There’s just no telling how many millions and millions of dollars the insurance companies are paying out for building damage, roof damage. It’s just going to get worse before it gets better for the consumers.”

Matt Cashion

However, severe weather is not the only reason rates have increased, said Eric Hodson, a State Farm agent in North Little Rock, who noted that of the top 20 homeowners insurance providers in the country, 18 lost money last year.

“Now people are like, ‘Hey, last year, it was a lot of storms. I paid premiums for years and years, so insurance companies having a loss year, that’s going to happen,’” he said, “but unfortunately, it was the fourth straight year for most carriers to have some type of loss.”

Eric Hodson

Inflation is a major reason for those losses, he said, adding that the cost of goods and labor needed to repair homes has skyrocketed since 2019. Accounting for those price increases and the costs of future storms sent rates up as insurers worked to price their products adequately.

“I think the average increase this year in the state of Arkansas’ been around 20 percent,” he said. “That’s a pretty big increase for everyone, especially when in the past, a double-digit rate increase, the max you’d ever hear was, like, 10 percent, so a lot of companies are even going over that 20 percent just to kind of get rate adequate.”

Cashion said national brands may not see the incentive to continue operating in the state, where they have likely paid out more than they have received in recent years due to weather claims.

“Our insurance commissioner, Alan McClain, has done, I think, a very good job trying to make sure that the insurance companies don’t leave our state,” Cashion said. “While our insurance is going up and it’s costing more than it ever has, at least it’s available.”

He added that insurance companies now depreciate the value of older parts of a home and give less of a payout, in addition to adding exclusions for cosmetic damage.

“They’re finding creative ways to stay in the marketplace and hopefully turn it around,” he said.

Underwriting has become more strict, Hodson said, adding that because roof repairs and replacements are the most common claims, insurance companies may ask for trees to be trimmed.

Claim history is another factor, and Hodson said insurers often look at claim activity as far back as three to five years. Claims made after storms are put in a separate category when looking at an applicant’s rating, he added.

“It can affect eligibility to even get insurance at a particular company but also can definitely affect the rate,” he said. “Sometimes, as underwriting gets more sophisticated with satellite imaging and drones, we can see the property and what needs to be addressed in order for us to be on the risk.”

Deductibles have increased, as well. Hodson said that when he joined the insurance industry in 2005, his company had a $250 homeowners deductible. The lowest is now $1,000.

“Percentage deductibles have gotten real popular in the last two years,” he added. “Just a simple example: I think an average house around here’s around $300,000, so if you had a 1 percent deductible, your deductible would be $3,000. It’d be 1 percent of your dwelling coverage, so anything below that would be uninsured, and anything beyond that would be a claim that you could file on your policy.”

Some policies may have a percentage deductible only for certain claims. For example, a policy could have a $1,000 deductible for most claims but a 1 percent deductible for wind and hail damage, the most common claim, Hodson said.

He added that he expects deductibles to continue increasing as a way of keeping insurance affordable in the future.

“I’m sure there are ways to carve out different coverages and different things like that, but I think the higher deductible to really take care of the smaller claims as a homeowners and really just rely on big-event insurance — that’s kind of what I think’s going to maybe happen down the road,” he said. “I wouldn’t be surprised if some of the minimum deductibles are maybe $5,000, $10,000 in the near future.”

WHAT DO POLICIES COVER?

A basic home insurance policy is a named-peril policy, meaning it insures homes against specific perils. The original peril was fire, Hodson said, but as the years passed, policies grew to include theft, wind and hail, riots or civil commotion, and the weight of snow and ice.

In addition to insuring the structure itself, home insurance policies also insure personal belongings, provide liability protection to homeowners and insure against loss of use so that homeowners have a place to stay, if needed, while their homes are being repaired, he said. He added that policies limit insurance on certain items, including jewelry and firearms, and it may be best to insure such items separately.

Policyholders can add an ever-increasing number of endorsements to their policies, he said, adding that one of the newest offerings is cyber event, identity restoration and fraud-loss coverage, which helps victims of identity fraud reclaim their identities and restore their credit ratings, in addition to helping victims of cyber events.

An add-on that insures against the backup of sewers and drains is another popular endorsement, he said, and many homeowners are opting for additional roof coverage because insurers no longer replace entire roofs as frequently as they once did.

One item not typically included in a home insurance policy that often surprises first-time homebuyers is flood insurance, Hodson said.

He added that most flood insurance is written through a program backed by the Federal Emergency Management Agency, which helps take the risk off home insurance companies so that plans remain affordable.

Another type of coverage not typically included in home insurance policies that is growing in popularity is earthquake coverage. Hodson said rates tend to be fairly affordable in Pulaski County and increase in the northeast toward the New Madrid fault line, where there is an increased risk of earthquakes.

“It is an endorsement. There’s really, really high deductibles, but it is designed for quote-unquote ‘the big one’ — you know, a truly devastational event,” he said.

Adkins said he has earthquake insurance on all the rental properties he manages, as well as his personal home.

“We’re in an area that, with the fault along the Mississippi River, something could happen,” he said. “It’s just a good way to be covered, and it’s not very expensive.”

WHAT COUNTS AS ADEQUATE COVERAGE?

There are plenty of ways to strip down a home insurance policy or reduce premiums by raising the deductible, Hodson said, and while that may be attractive to homebuyers looking to buy the best and largest house they can afford, it can also cause headaches come claim time.

“I would shop, but cheaper isn’t necessarily better because of deductibles and coverages and things like that, so understand what you’ve got,” he said. “Understand sometimes a company may be a little more, but there may be a reason for that.”

Another mistake Hodson said he often notices homebuyers making is purchasing at the upper limits of their budgets, not considering that taxes and insurance rates will likely rise, even if homeowners’ income does not.

“[Insurance rates] have been going up a lot recently, but they go up 2 or 3 percent every year, and your taxes are going to go up a bit every year or at least every three years,” he said. “A new homeowner needs to understand to give themselves some wiggle room and maybe have to back down. ‘Hey, I’m approved for this, but let’s back this down a little bit.’”

In addition, he said, homeowners should consider the replacement value of a home, not just the purchase price. A homebuyer might pay $200,000 for a home, but the home could cost $300,000 to replace due to increased costs of goods and labor.

“It may be a 15-year-old house or 20-year-old house. It may have older carpet that’s never been replaced,” he added. “Well, we’re going to replace the majority of that brand new, and we have to look at what labor rates and the price of materials are today and price it based on that and insure the property based on that.”

Because the industry has changed so much in recent years, Hodson recommended homeowners who have not looked at their insurance policies in a while schedule a time to review their policies with their insurance agents to ensure they are still adequately covered and determine if any new endorsements might be a good fit for them.

“I think people don’t think that it’s going to happen to them, you know, and statistically, it probably won’t, but when something like a major hail storm or a tornado or even a flood happens, it’s usually worse than what they envision, and a lot of times, they just hadn’t planned mentally for an event like that,” Hodson said. “I mean, you don’t want to go around like Chicken Little, thinking the sky’s falling every time there’s clouds in the sky, but it always seems to be worse than people realize.”