I.I.I. Projects 8 Percent Homeowners Rate Rise

This projected rise means the average cost for home insurance nationwide in 2004 would be $615, a jump of $46 for the average homeowner, I.I.I. said.

Part of this projected increase reflects the rising construction and home improvement costs--the "choices more homeowners are making," explained Robert Hartwig, I.I.I.'s senior economist.

According to I.I.I., some 41 million homeowners have added to or improved their homes between 2001 and 2002. And in 1999--the most recent year for which annual figures are available--roughly $25 billion was spent on home improvements.

"People are taking advantage of record low interest rates and are moving into new homes or making additions to their existing homes in near record numbers," Mr. Hartwig noted. He also pointed out that while upgrades and additions are pushing up insurance costs, policyholders are still expecting their premium rates to stay the same. "They don't realize they have more house to insure," he commented.

Another main cost driver for rising premiums is the increasingly expensive natural disasters, I.I.I. noted.

During the 1990s, the severity of catastrophes started to increase dramatically, and since 1990, insurers have paid out more than $100 billion in CAT-related losses, or about $700 million per month. Mr. Hartwig said these catastrophes included major events such as Hurricane Andrew and the Northridge earthquake, but also hundreds of smaller disasters.

"Homeowners insurance rates in many parts of the country continue to rise because of the extraordinary costs associated with paying these claims," he said.

"In fact, virtually every part of the country is either at risk of or has experienced a billion-dollar disaster."

Furthermore, the sharp rise in mold damage claims has also created an added burden for home insurers. "No one wants to see the virtual collapse of the insurance market in Texas happen anywhere else, so steps are being taken to limit coverage and contain mold costs," Mr. Hartwig observed. "We are still in a situation where any water damage claim anywhere in the country can produce a million-dollar lawsuit. Insurers have to factor that into the cost of insurance."

All these factors have helped create poor underwriting results for the home insurance sector during the past several years. In 2002, home insurers paid out $4.73 billion more in losses and expenses than they received in premiums. And in 2001, home insurers lost $7.43 billion, the second-worst year on record, according to I.I.I.