The hidden expense that's sucking $74 billion out of the economy

On Lyndale Street in the Logan Square neighborhood of downtown Chicago sits a six-unit condo building. The rather average building is home to more than a dozen residents, a mix of professional couples and families with kids. Everyone in the small community pays homeowners-association fees to cover building improvements, various repairs, and basic amenities like upkeep of the common area and trash removal. But lately the Lyndale Street residents have been sharing a new burden: soaring insurance costs.

The cost of insuring the property jumped by 43% from 2019 to 2022, forcing the board members in charge of managing the building's finances to make some tough choices. The board shopped around each year for lower insurance prices and tried to find other ways to save money, such as having the board president do the landscaping. But even with all the creative thinking, the board had to raise HOA fees by 15% over the past four years to help cover the higher insurance costs. A former resident who served as the board's president but recently resigned to move to the suburbs, told me that trash removal and insurance were the two main culprits for what they called a "mind-boggling" 47% increase in fees since the building's construction was finished in 2017.

"No one wants their monthly costs to increase, but when you have to tell them it's not even for additional services, well that just feels awful," they said, requesting anonymity to discuss private financial deliberations. They said rising costs kept the board from expanding amenities residents wanted, such as a shared composting system. "We were so strapped just covering the basics," they added.

The financial squeeze facing the Lyndale Street residents isn't unique. The cost to insure major investments like homes and cars has over the past few years been skyrocketing, hitting owners' pocketbooks and trickling down to renters. Because this insurance is often essential, the increased prices are putting a vice on consumers' ability to spend elsewhere. Economists worry that rising property-insurance costs — on top of pressures like student-loan repayment and dwindling savings — could cause many Americans' household budgets to finally crack and hamstring the driving force behind the US economy's sustained strength.

Rising price for peace of mind

In the constellation of household costs, insurance is often one of the lesser-noticed line items. Insuring your property is often required by your mortgage lender or state government, making the payments feel more like a force of nature than an active spending decision. For years this price for peace of mind didn't feel too burdensome: Insurance rates have been kept low because of a combination of state regulation and companies' desire to attract new customers. But recently the rising cost of repairs and the frequency of damaging weather events have made the deal go sour. Insurance companies are wising up and raising premiums — or in some cases refusing to offer coverage at all.

Research released in August by Bank of America economists indicated the median total cost of home and auto insurance had risen by 18% since 2020. Increases in homeowners' premiums have gotten even steeper in recent years. While the cost of a homeowner's policy varies by state and the size of the home, the average nationwide annual premium at the start of 2023 was $119 a month for a policy with $250,000 in dwelling coverage, according to the financial-data provider Bankrate, while analytics firm S&P Global projected that premiums would grow by 12% this year. Publicly available data indicates 74 million US homeowners have insurance. If S&P's projection proves accurate, then America's homeowners can expect an average monthly payment of $133 to start 2024. That means Americans could pay roughly $13 billion more for home insurance next year. And the costs don't just fall on homeowners: Bank of America found that renters' payments to insure their belongings, including cars, had increased by 8.5% a year since 2020, an almost 28% overall jump over that time.

S&P expects car-insurance rates to jump by nearly 16% in 2023. Last year's average monthly payment was $148 for full coverage, per Bankrate. Given that IBIS World estimates 215 million Americans have car insurance this year, that'd be roughly $24 more going from people's pocketbooks to auto insurers each month, or $61 billion for everyone for the year. While these are rough calculations, they suggest Americans could be paying $74 billion more next year for insurance for their major investments.

The reasons for the jump in insurance prices are varied, but the most obvious is the climate crisis. The number and intensity of destructive weather events are on the rise, causing greater damage to homes and cars. Inflation has made the work and materials necessary for repairs more expensive. As insurers are forced to pay out more in damages, they end up raising their prices. In recent years they haven't raised premiums enough to cover their costs — the American Property Casualty Insurance Association suggests the industry lost nearly $26 billion in 2022.

"You might get mad at the insurance company for raising your premiums," said Mark Pauly of the University of Pennsylvania's Wharton School of Business, "but they're doing that either because they already have suffered substantial losses in their homeowners business or they're trying to protect against having that happen in the future."

This adds up to higher insurance bills, particularly for people in especially disaster-prone places. Florida, for example, has over the past three years been hit by 21 disasters that each caused at least $1 billion worth of damage, NOAA reports. Meanwhile, property-insurance rates in the state have soared: The Insurance Information Institute found that Floridians' property-insurance costs had doubled over the past three years, to an average of $6,000 a year. The institute estimated the cost would increase by another 40% over the next three years. The economics of insuring homes have gotten so bad in the state that some insurance companies have pulled out of Florida altogether.

"That's an example of the market giving you a signal that there is a high risk that we're going to have to rebuild this place," said Tim Quinlan, a senior economist at Wells Fargo, "and, you know, no one wants to get stuck holding the bag to pay for that."

Money suck

What happens when your monthly insurance payments, a nearly mandatory cost of existence, suddenly go up? If you're like most Americans, you'll cut your budget for things that are nice to have but that you can do without, such as going to the movies, traveling, or getting a massage.

While it may be a bummer to forgo fun activities, Quinlan told me it's also a problem for the US economy. Consumer spending is a key force that keeps the economy humming along — it accounted for 68% of gross domestic product in the third quarter. Quinlan said that while households have been able to dip into savings built up during the pandemic to sustain their spending, "each month that it gets spent down, that leaves us with a smaller pile of cash to finance things in the future and more vulnerable to a disruption like homeowners-insurance costs."

Insurance is just one of many nonnegotiables increasing in price, Francesco D'Acunto, an associate professor of finance at Georgetown University's McDonough School of Business, told me. As utility bills, groceries, and other basic goods get more expensive, he said, people spend less on services like dining and travel and products like clothing.

"I cannot stop purchasing very basic goods and services I need from one month to the other," D'Acunto said.

Rising insurance costs could inflict more pain on another bruised area of the economy: housing affordability. A lack of available homes in the US has pushed affordability to its lowest level since 1985. A family earning their state's median income can't afford a mortgage on a median-priced home in 14 states; in 2019, that applied to only two states. Pauly said that because insurance is typically part of calculating a monthly mortgage payment, rising premiums could deter people from buying a new home. Seeing that bigger number, Pauly said, might give people a good reason to "keep renting the old apartment."

A never-ending march?

While economists I spoke with were worried about the effects of these rising costs, they didn't necessarily think homeowners insurance would be what tipped the scales to send the broader economy into a recession — $74 billion may seem sizable, but it represents only about 0.4% of total consumer spending in 2022. But the big bite out of people's free cash would still have serious consequences for businesses and workers who rely on the financial might of the American consumer. And even if the country can limp on, soaring premiums can severely disrupt the personal finances of a few distinct groups.

"The broader economy is probably going to be fine," Quinlan said. "What I do worry about is on a microeconomic basis."

The biggest threat, economists said, is to three groups: people on fixed incomes, people in older homes, and people in high-risk areas. Think a retiree living in an older home in Florida, or someone on disability in California whose home needs repairs to be insurable. People on fixed incomes, like Social Security or disability, can't afford a bill that grows faster than the inflation adjustment that comes with their monthly checks. If they've already paid off their home and no longer have a mortgage requiring insurance, they might just decide to go uninsured. Older homes are at the most risk of weather-related damage, and their repairs could be the most costly. For this reason, insurance companies could decline to cover them or require costly upgrades before agreeing to a policy. As a result, economists said, these market forces could incentivize people to avoid living in certain areas of the country.

"That's just Mother Nature literally telling you, 'You know, it's nice to have an ocean view, but you're gonna have to expect a higher price,'" Pauly said.

Dangers also lurk beyond rising costs: Insurers could increasingly abandon areas that are no longer profitable, sticking homeowners with the bill when severe weather ravages their homes. More people could end up with a confusing patchwork of coverage from different insurers; many policies don't cover events like landslides, and homeowners generally have to buy flood and wind insurance separately.

Economists told me the increasing pressure on insurers and the rising needs of homeowners means the future of insurance could look a lot like the flood-insurance market. Since 1968, the federal government has offered policies through the National Flood Insurance Act, though Congress opened the door to more private options in 2012. Flooding is by far the most common type of home damage in the US, making it a losing business for private companies. So most homeowners' policies don't offer it. The law allowed the federal government to take on the burden in the name of protecting American property.

As claims of all kinds rise, one solution is to shift more of the cost to the public balance sheet. Another is to adopt stricter government regulation of home-insurance policies.Lawmakers in California are trying that approach. They issued a flurry of executive orders in September aimed at transitioning more policyholders back to private insurance from the state's last-resort plan by requiring insurance companies to cover high-risk areas, incentivizing homeowners to take precautions against wildfires, and hiring more staff to review rates and enforce regulations.

The government could also increasingly invest in better infrastructure to mitigate damage from extreme weather. "That's why we have government," Pauly said, "to protect against things that individuals can't protect against. Like, I can't build a levee."

But barring major government intervention in the insurance market, as long as the climate crisis continues to get worse Americans are going to have to pay more to protect the things they care about, even as it sucks more and more money from their budgets.

"This is a way to bring climate change home to people," Pauly said, "because this hits them in the pocketbook as opposed to being an abstract issue."

Bartie Scott is deputy editor for Business Insider's Economy team.