5 Reasons Lumber Prices Are Rising and What It Means for Your Insurance Policy
It’s no secret that lumber prices have increased dramatically over the last two years. In fact, the National Association of Home Builders (NAHB) deemed rising lumber prices as the main culprit for recent surges in construction costs. According to the NAHB, lumber is up 240% from 2020 and has risen an additional 67% since the beginning of 2021. Yikes.
While COVID-19 is certainly a contributing factor, there is more going on here than meets the eye. Together, several factors are working together to create a “perfect storm” and drive lumber prices “through the roof,” so to speak. If you are a homeowner with replacement coverage, we know you’re probably wondering exactly why lumber prices are on the rise and especially what these surges mean for your insurance policy. Let us tell you.
#1 – COVID-19 Closed Lumber Mills
Increases in lumber costs are partially linked to the COVID-19 pandemic and here’s why: due to stay-at-home and social distancing orders, many lumber mills were forced to close in the spring of 2020. As a result of subsequent business interruption losses, some never reopened. The mills that did reopen continued operating at limited capacity. Complex computer operations mean it can take up to two years to build a new mill and get it operational, so, as of right now, we have limited production capacity in the lumber industry while new mills get under way. In the meantime, that means there is a heavily restricted supply of lumber available to homeowners and commercial developers for new construction projects.
#2 – Interest Rates Hit an All-Time Low
The low interest rates we’ve seen in recent years motivated an increase in home purchases as well as a surge in home renovation projects. In addition to this, cancelled vacations and more people working from home delivered above-average investments in home improvement projects. This has pushed demand for lumber way up while the supply remains way down. This current supply and demand curve for lumber is a virtual recipe for outrageous lumber prices.
#3 – We’re Facing a Global Labor Shortage
As if we didn’t have it hard enough already, we are in the midst of a global labor shortage. These are impacting industries at every point on the supply chain, including lumber mills that are already operating at limited capacity. Fewer workers in the mills means the timber isn’t being cut and processed as quickly. Fewer truck drivers means it’s more difficult to transport the lumber. Ultimately, these labor shortages are making it costly to retain skilled workers and even more difficult to keep up with skyrocketing demand.
#4 – Gas Prices at an All-Time High
With gas prices at an all-time high, freight costs for lumber have gone way up. As the end user of those materials, homeowners and commercial developers are ultimately the ones paying the price.
#5 – We’re Dealing with More Catastrophic Losses than Ever Before
We’ve experienced more catastrophic events over the past two years than ever before. According to the Insurance Information Institute, there were 94 natural catastrophic events in the United States in 2020, which was up 88% from 2019. These included damages amounting to $58 million from earthquakes; $930 million from winter storms; $2.2 billion from flooding; $13.9 billion from wildfire, drought, and heatwaves; $21.6 billion from tropical cyclones, and $35 billion from severe convective storms. Unfortunately, since insured losses from natural disasters hit a 10-year high of $42 billion in the first half of 2021, this year doesn’t look to be any better. The uninsured costs of these disasters for lumber mills and their supply chains are ultimately passed on to end users, which are primarily homeowners and commercial developers.
What This Means for Your Insurance Policy
Your insurance rates are based on property values, liability exposure, and your claims history. Changes in any one of those items will have an effect on the price of your insurance. At a minimum, we’ve seen 4% increases on noncoastal accounts with no claims history. On the high end, we’ve seen 25% increases from some carriers even on accounts with no claims history. For coastal communities, which have higher exposure to catastrophic losses, and accounts in the Excess and Surplus market, we’ve even had increases upwards of 40%.
Proper building valuation is critical when calculating your replacement costs. This is how we ensure you have appropriate coverage in the event of a loss and that you are not underinsured. As carriers calculate building replacement costs in 2022, expect to see higher than normal increases and be prepared for higher premiums.
Our JGS Promise to You
At JGS, we promise to continue our due diligence and make sure you have comprehensive coverage at a competitive price. This includes marketing your insurance to additional carriers where we are seeing greater than anticipated increases from your current insurance carrier. Where possible and desired, we will place coverage with carriers that offer Extended Replacement Cost and Guaranteed Replacement Cost to help protect you from additional increases in building materials and prevent you from being underinsured part way through your policy term. To review your policy and ensure you have the coverage you need to address rising lumber costs and more, contact us today.