Economic shifts shape unfolding journey for many homeowners insurers

December 9, 2021 / 5 min read

The push and pull of supply-chain issues, labor shortages, and elevated demand for building materials and tradespeople are adding complexity for many U.S. personal property insurers as 2021 gives flows into 2022. The landscape is likely to continue shifting as the economy moves through the ongoing pandemic.

Building contractors, and by extension many insurers, faced pandemic-driven supply constraints and soaring prices before they became top-of-mind in the wider economy. With supplies and workers harder to find, many projects are taking longer and costing more to complete. Verisk reconstruction cost data shows materials and labor costs continued to increase in 2021, building on a surge driven by a historic spike in lumber prices.

2022 economic shifts for personal property insurers

With supplies and workers harder to find, many projects are taking longer and costing more to complete.

Verisk data shows total reconstruction costs, including materials and retail labor, increased 5.8 percent from October 2020 to October 2021—still a brisk pace of increase, although down significantly from the 16.7 percent rise between July 2020 and July 2021. The lumber market has cooled since last year, when COVID-19 arrived on top of lingering effects dating back to tariffs imposed on Canadian lumber in 2017 and even the Great Recession.¹ But supplies remain tight, not only for lumber but for many of the materials and items needed to meet surges in both new construction and renovations and improvements to existing homes.

Wide-ranging shortages

More than 90 percent of builders in a recent survey reported shortages of appliances, framing lumber, plywood, and oriented strand board (a type of engineered wood), according to the National Association of Home Builders (NAHB).² Finish materials, such as wood interior trim, have also been scarce, with costs rising in the material categories.

Localized events can exacerbate the strain. The winter storm that paralyzed a large swath of Texas in February left plumbers and property owners scrambling for hard-to-find supplies, including major components such as water heaters. Pandemic-induced cutbacks in production were partially to blame.³ And extreme weather also affected Texas as a major manufacturing hub for petrochemicals and plastics. The February freeze, coming on the heels of a damaging 2020 hurricane season, created challenges for plants to restore and maintain production.⁴

Lumber and trim cost per month

Even when the materials are available, the labor to put them together may not be. Amid shortages of skilled tradespeople, the labor component of reconstruction costs increased steadily, with 12-month increases of around 4 percent through the first three quarters of 2021. The largest increases were for plumbers, general framing carpenters, and electricians. The latter group is on a long-term declining trend, widening the existing shortage: The National Electrical Contractors Association estimates that 7,000 electricians enter the trade each year, but 10,000 retire.⁵

Shortages coincide with spikes in demand

The demand pressures don’t appear likely to abate soon. While the housing market shows some signs of being past its peak, it remains extremely active, including new construction, as existing inventory can’t meet buyers’ appetite. Single-family housing authorizations held at a 0.92 percent increase year over year in October, while month-over-month activity declined 1.36 percent, according to Verisk data. The pace of year-over-year growth has slowed since May, driven by high building material costs and persistent labor shortages. Despite these factors driving affordability challenges, homebuilder confidence jumped to its highest reading since July—an indication of strong consumer demand.

Meanwhile, the shift to remote work that has brought the office into the house for many people—a major driving force behind home improvements—may only partially reverse itself as some companies decide not to reopen their facilities or trim employees’ on-site obligations. A recent Upwork survey, released September 29, highlights current expectations around remote work: Businesses expect 58 percent of their remote workforce to be fully remote in five years, compared with a pre-pandemic forecast of 38 percent.⁶

All of this creates more incentive for many homeowners to optimize their living and work spaces. Maintenance volume and spend respectively increased 1.4 percent and 9.1 percent year over year from October 2020 to October 2021. Remodel activity—a subset of maintenance that includes renovations, additions, and alterations—posted a 9.4 percent year-over-year increase in spend, yet volumes declined 2.9 percent, according to Verisk data. It’s possible that rising building material costs have deterred homeowners from embarking on larger-scale projects as many remodelers have raised prices in recent months.

Potential implications for property losses

The tensions of supply and demand, paired with the ongoing adaption for hybrid work settings, bring another set of considerations for property insurers’ profitability. On one hand, disrupted supply chains and labor markets are putting upward pressure on reconstruction costs and ultimately claims payouts. On the other, the increasing, round-the-clock presence of people in many homes appears to help prevent some incidents that typically lead to claims. Thieves are deterred by residents at home, decreased social interaction means less exposure to mishaps, and incidents like water leaks may get detected more quickly, preventing some claims.

The effects are showing up in many property insurers’ loss experience. Claim frequency for theft, liability, and medical payments was consistently down by close to a third through the first and second quarters of 2021—even more pronounced than the declines recorded in the first half of 2020. Non-catastrophe fire and water non-weather frequency was generally flat.

Loss Frequency 2021 vs 2019

3 keys for homeowners insurers to stay competitive in a changing environment

As many property insurers continue to adjust to an environment that hasn’t yet reached equilibrium, they may benefit from strategies that help them stay informed and agile:

Amid material and labor shortages and surging reconstruction costs, maintain a steady connection with current data to help ensure appropriate coverage for policyholders.
Keep abreast of additions, renovations, and upgrades with change detection tools and track new liability exposures to maintain insurance to value and collect more appropriate premiums for the risk.
Watch reopening trends in the new year for their potential to affect loss experience as stay-at-home patterns shift again.

Watch for continuing updates as Verisk’s experts track changing market conditions and explore Verisk homeowners insurance solutions that can help keep business moving forward through uncertainty.

Trish Hopkinson, Louis Vuksinick, “Current cost estimates key to manage lumber’s ‘demand surge,’” Visualize, August 30, 2021, < https://www.verisk.com/insurance/visualize/current-cost-estimates-key-to-manage-lumbers-demand-surge/ >, accessed on December 3, 2021.
“Record Number of Builders Report Material Shortages,” NAHB Now, June 2, 2021, < https://nahbnow.com/2021/06/record-number-of-builders-report-material-shortages/?_ga=2.137028848.1543610735.1636725853-1396958761.1636725853 >, accessed on December 3, 2021.
Duncan Agnew, “Plumber shortage and supply chain issues are delaying storm recovery efforts in Texas,” The Texas Tribute, February 26, 2021, < https://www.texastribune.org/2021/02/26/texas-plumber-shortage-winter-storm/ >, accessed on December 3, 2021.
Natasha Dailey, “A shortage of plastics could force a 'fight for materials' among retailers, car makers, and more after Texas storm upends manufacturing: Report,” Business Insider, March 17, 2021, < https://www.businessinsider.com/plastics-shortage-texas-freeze-storm-uri-fight-for-materials-2021-3 >, accessed on December 3, 2021.
Shortage of Qualified Plumbers Plaguing The Plumbing Industry, Waterwork Plumbing, < https://waterworkplumbing.com/qualified-plumber-job-shortage/ >, accessed on December 3, 2021.
Adam Ozimek, Future Workforce Report 2021: How Remote Work is Changing Businesses Forever, Upwork, < https://www.upwork.com/research/future-workforce-report >, accessed on December 3, 2021.

Economic shifts shape the unfolding journey for homeowners insurers

Wide-ranging shortages

Shortages coincide with spikes in demand

Potential implications for property losses

3 keys for homeowners insurers to stay competitive in a changing environment