Why is homeowners insurance so expensive in the Upper Midwest? The increasing number of extreme weather events and high construction costs are forcing property insurers to significantly increase their prices, even in places where you might not expect it.
This is according to an article published by the Federal Reserve Bank of Minneapolisciting data from S&P Global showing that homeowners insurance premiums nationwide have risen by as much as 34% over a seven-year period.
But states in the Ninth Federal Reserve District — which includes Minnesota, Montana, North and South Dakota, 26 counties in northwestern Wisconsin and Michigan’s upper peninsula — have seen their premiums rise even faster than the national average. In South Dakota, premiums rose 41% over that seven-year period, while inflation grew 24% over the same period.
“At the same time, what homeowners receive for their premiums has declined as insurers impose new conditions on coverage for common perils such as wind and hail damage,” the article said.
What’s more: catastrophic weather conditions are “an important driver” for premium increases.
“In Florida, it’s hurricanes,” the article explained. “In California, Montana and many western states there are wildfires. In the Upper Midwest there will be wind and hail showers. These are all exacerbated by construction cost inflation. The financial stress has also spread to homeowners. In addition to protecting an important investment, homeowners insurance is often necessary for those with a mortgage.”
The costs of maintaining homeownership are an important factor for housing affordability. Premiums have risen most sharply in states prone to certain extreme weather events, the article said.
“The states with the fastest premium increases since 2017 are mainly west of the Mississippi, in areas prone to tornadoes, hail or wildfires,” the report said. “In the Ninth District, that includes South Dakota, Minnesota and Montana, all of which have seen premiums rise faster than the national average.”
Insurance premiums are not arbitrarily set by the sellers themselves, but undergo a review process by the regulators, while the insurers also try to maintain their competitive position with other companies in the sector. This also needs to be balanced with the amounts required to pay out claims.
“In Minnesota, for example, requests for premium increases submitted by insurers are reviewed by actuaries from the Ministry of Commerce to ensure they are neither too high nor too low,” the article said. “Average homeowners insurance premiums have increased 39% over the past seven years, and 15% in 2023 alone.”
Julia Dreier, Minnesota’s deputy insurance commissioner at the state’s Department of Commerce, says in the article that the increases — exorbitant as they are — make sense to regulators.
“Many companies have been operating at a loss for quite some time,” she says. “What we would normally have seen in the insurance market is that you would expect some years of losses, but also some years where they don’t lose that much money. And we’ve just seen more than five years of sustained losses.”
For homeowners in the Upper Midwest, it also doesn’t help that nearly half of 2023’s 19 “billion-dollar storms” — which cost at least a billion dollars in damage — occurred in the Ninth District states.
This leads to losses for carriers, who then have to increase premiums based on market realities, which then puts financial pressure on consumers to either opt for cheaper, more limited coverage or risk not paying for insurance at all. More accurate measurements enabled by technology are also revolutionizing a previous insurance standard.
“In the past, all homeowners within the same zip code paid the same rate per dollar of coverage,” the report said. “But with the data and computing power available today, insurers can determine whether homeowners in one area are more vulnerable to hail damage than those in a neighboring area.”
