If you've recently bought or plan to buy homeowner's insurance, you're likely to know about the higher cost of premiums over the past few years.
Premiums for all categories of insurance rose at an annual rate of about 4.8% from 2003 to 2004, according to the Insurance Information Institute's current edition of the Financial Services Fact Book.
Over the same period, premiums for what the institute calls "multiple-peril" coverage -- hurricanes, tornados and other weather-related disasters -- increased 8.5% over the same period, the report says.
Overall, homeowner's premiums rose another 6% in 2006 and were expected to rise another 4% in 2007, the institute estimates. The institute estimates the average household expenditure for homeowner's insurance in 2006 was $835.
To understand why premiums increase, it's important to understand an insurer's reliance on its loss ratio. Loss ratio is the percentage of premiums that an insurer pays out in claims.
For example, a loss ratio of 97% means that for each $1 in premiums it receives, the insurer pays out 97 cents in claims. If the insurer seeks to maintain a constant loss ratio and claims are increasing, the insurer has little choice but to hike premiums.
Larger claims over the past several years have been a major reason for higher premiums, the institute says. In the next topic, we look at how higher claims are also making it harder for some homeowners to buy an affordable policy.