The replacement figure does not encompass the value of the land on which the home is built but is intended to cover the expense, minus any deductible, to return the home to the way it was before the loss occurred. It is not supposed to take into account the market value of the home.
Prior claims, the manner of construction, a home's age and the adequacy of municipal fire protection are other considerations insurance companies use to calculate rates, according to the insurance administration.
At State Farm, a major insurer of homes in Maryland, rates are "based on each state's claims experience," said Anna Bryant, a regional spokeswoman for the company. "We take into account claims during previous years as well as projected losses, expenses and premiums," she said.
Increasing claims amounts are driving the rise in premiums, said David L. Corum, vice president of the Insurance Research Council, a nonprofit supported by property and casualty insurance companies and their associations.
Across the United States, the yearly average homeowners insurance claim payment per insured residence went up 173 percent between 1997 and 2011, according to a report the council published in September. In Maryland, the increase over the same period was 232 percent, the report said.
In 2005, the average claim payment per insured residence in Maryland was just under $210 — and very few of the claims were related to catastrophes, according to the council's report. In 2011, the average payment was almost $615, and more than 40 percent of the claims were related to catastrophes, it said.
"Claim costs clearly are the biggest driver of the cost of insurance," Corum said. "There's a huge increase in catastrophe-related claims in Maryland."
Costs passed on
Fulcher's take on her rising premium coincides with Corum's explanation of the state's homeowners insurance trends. It's the increasing amount that insurers are paying out for natural disasters in recent years — such as Hurricane Irene in the summer of 2011 and the record snowfall in the winter of 2010 — that are encouraging insurers to find ways to increase consumers' rates, she said.
"I think the insurance companies have paid out a lot of money for various storms and so forth, and this is how they're getting their money back," Fulcher said. "It's a way to recoup money. ... You've got to get it off the back of somebody."
The most likely explanation for Fulcher's "unusual" premium spike is that her home's replacement value was too low to begin with, said Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute, which has dozens of insurance companies as members.
Fulcher said the last time an inspector looked at her home and arrived at a replacement value was about a decade ago, when she first applied for a policy with Travelers. It could be that the original estimate was inaccurate, Weisbart said, but there are other factors that might also be contributing to the increase.
"There's all kinds of lesser costs that add up. Those get passed through, just as the price of leather would if you're selling shoes," he said.
For instance, because interest rates are so low, insurers are making less money on investing premium funds than they used to, he said, and they have to raise rates to compensate. Plus, the costs of building materials are rising faster than inflation and because the number of claims is increasing, the price of reinsurance (essentially, insurance for the insurer) is also rising, Weisbart said.
There's also the fact that instances of severe weather seem to be increasing, an indicator that the number of claims will stay elevated, he said.
Although most of what goes into calculating an insurance rate is outside a homeowner's control, Fulcher plans to argue for a reduction at her hearing. Characterizations that her home has a finished basement and a fireplace, for instance, are inaccurate and should not be used when calculating replacement value, she said.
But figuring that a reduction in her premium is unlikely and wondering where she's going to get the money to reimburse her mortgage company, she is contemplating reducing her coverage.
Travelers sent her a letter saying, "Our underwriting standards prohibit us from continuing a policy where the dwelling is not 100% insured to value," so she would have to change insurers if she were to choose to decrease her coverage.