Are we paying too much for insurance? Part 2

So, last week I started with the discussion of the price of homeowner's insurance and it's increases in the last couple of years. This week I wanted to see if I could help adjust perspective even more and possibly take a new approach to where the trouble may be.

In 1970 the median income was $7,630 while a new car was $3,900, the average cost of a new home was $23,400 and the average cost to insure that home was $104. Meaning the ratio of income was 32.6% of the average new home value and the insurance expense to insure that home was 1.36% of the annual income. While the ratio most related to our focus of discussion, insurance to home cost was .45%.

In 1980, the numbers changed to $16,523, $7,210, $64,600, and $179 respectively. Bringing the ratio of income to home cost down to 25.6%, the insurance expense to income to 1.08% and the insurance to home cost ratio to .278%. This 10 year gap has created basically a double in income and care value but a triple in home price and only a 75% increase in insuring that home. Now, I understand that as time goes on and the underwriting process and the law of large numbers comes in to play, insurance can get better about predicting the process and actuaries are able to set a most reasonable rate for the insurance, but if the gap of building a home and the gap to protect the home in case of needing to be rebuilt gets too wide, eventually it will cause trouble somewhere.

Skip ahead 30 years, 2010, incomes are $48,340, cars are $29,217, homes are $221,800 and insurance is costing $807. This now means the ratio of income to home cost is 21.8%, insurance to income is 1.67%, and the insurance to home cost is now up to .365%, (at a time when some of the largest natural disasters have accumulated across the nation and world). So, here in lies my question, are we paying too much for insurance or is something else out of balance creating the perspective that we are paying too much for insurance?

For most people, the purchase of a home or car does not happen monthly or even yearly, and no matter how money they are being paid, the checks never seem to be enough or the increase of that check from year to year is not enough. Although, they typically see an insurance bill monthly or at least annually and the reminder that the rate changes is more visible. In reality though, looking back at these numbers, most things are on a somewhat even pace, where insurance lagged behind in cost at one time it has had to make up ground to keep companies in business for those who have their policy with them and those future needs. But, home costs have seemed to increase at a greater margin than these other expenses, and additional 200% increase in the past 40 years. And in that timeframe, lending institutions directed by the governments plans have helped people purchase those homes at a much lower income to home value ratio.

So, where is the problem truly at, who is continuing to push it forward and how can we resolve it to help keep things in balance for the future growth and development of our economy and nation? I would love to hear your thoughts and discussion on this matter!

Until next time, remember, at Advantage 1 Insurance, every policy comes with an agent!