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The second coverage type – much more common than Actual Cash Value – is based on Replacement Value, which is intended to collect full replacement costs for sustained losses. However, many homeowners insurance policies contain co-insurance clauses. These clauses are used to ensure that policyholders insure their property to an appropriate value and that the insurer receives a fair premium for the risk. If a property is not insured to an appropriate value, a coinsurance penalty will apply, which limits the amount of a claim that can be returned to the policyholder if a covered loss occurs.
Ultimately, consumers should be prepared for insurance rates to increase, and importantly, they should also be aware that, should a loss occur, they may not have enough coverage to protect their home. For their part, insurers should be communicating to insureds about potential increased costs, and be gathering as much data as possible to quantify uncertain risk factors pertaining to economic and market conditions in order to ensure sound business decisions.
Update from the author: Shortly after I posted this blog, COVID-19 news and vaccine rollout materially changed the market conditions for lumber, and in early July 2021, lumber prices began falling precipitously. We have yet to see if the fall in prices will be long term, or what implications there will be for home insurance prices. Pinnacle will continue to monitor the lumber market conditions and their impact on rates and provide additional analysis and updates accordingly.
Jordan Paszek is a consulting actuary with Pinnacle Actuarial Resources in the Bloomington office. He holds a bachelor’s degree in mathematics from Dominican College and a capstone certificate in actuarial science from the University of Wisconsin. Mr. Paszek has experience with actuarial studies for captives, self-insureds and traditional insurance companies involving loss reserving, loss cost projections, risk margin calculations, simulation methods and commercial lines ratemaking. He also works with funding and reserve analyses for single-parent captives that write coverage for enterprise risks. Mr. Paszek serves the Casualty Actuarial Society (CAS) as a member of the Member Advisory Panel.
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