Finally understanding why insurance rates always seem to increase

why-insurance-rates-increase

The financial crisis of 2008 was simply devastating. It impacted everyone, from individuals to families, to businesses large and small.

Many consumers are still in “crisis-mode”, trying to cut costs wherever they can in an economic environment that up until about 3 years ago was in a near recession.

Despite an overall improving market since that crisis, insurance rates are still on the rise, and many people are completely in the dark as to the reason why. There are so many myths and misinterpretations of how insurance works and why rates are what they are so much so that I decided to write an article on it, How Home & Auto Insurance Rates Are Determined, as well as address it live on the radio in February 2014.

What many insurance consumers fail to realize is that insurance rates are based hundreds if not thousands of variables. For example, your auto insurance rate is not just based on the kind of car you drive. It’s based on a ton of other things, like loss ratios in your rating territory, your age, credit/insurance score, driving and loss history, and how many other drivers are on your policy and/or in your household — and that’s just a few of them.

Your homeowners policy rate is not just based on the market value of your house, nor is the coverage.

Insurance rates change, because both the economy, and the risk pool of the insurance company are constantly changing.

It’s also important to understand that you are not the only person that your insurance company insures. You are simply one piece of a much larger risk pool. For lack of a better analogy, you are essentially bathing in the same water as millions of other policy holders your insurance carrier insures, who by the way, all have completely different risk profiles, credit, and loss history.

Actuaries base insurance rates on this combination of very complex variables. It’s very much a complicated algorithm of sorts.

Understand that when your insurance premium increases, it’s not that your insurance company is just increasing your rate. They are not picking on you. They are adjusting their pricing for everyone they insure, based on among other things, the loss profile of the total pool of policy holders.

The true function of insurance

Remember, the basis of insurance is spreading risk over a large number of people, who all share in the cost. What they also share in are the losses too, so yes, other people’s accidents and losses can and do contribute to your increasing premiums. There’s no hiding from it and no matter how much we may not like it, that’s always how insurance has worked, and that will never change.

It’s also important to understand how the overall economy impacts insurance rates. Insurance is very much tied to the financial markets, and overall economic climate.

Insurance companies make money just like me and you do. They take their earnings, and invest them. When the stock market crashes, not only are we as individuals impacted negatively, but so are business and insurance companies.

Sure, insurance companies are in the business of collecting people’s money, but they are also in the business of paying out a lot of money too, so they are in a unique position. Unlike a typical business whose profits begin after their overhead costs are covered, insurance companies need to bring in enough money to cover their overhead costs, but also cover the billions of dollars in losses incurred by their policy holders each year. Those billions of dollars are also known as ” loss reserves”.

For that reason, it’s difficult for insurance companies to determine how much revenue they will generate from year to year. They can attempt to predict how much they will make through underwriting, but it’s not an exact science. Things happen. Natural disasters happen that make it almost impossible to predict these types of things.

The financial crisis of 2008 contributed to in large part, a hardening insurance market, where premiums are increasing by double digit percentages, and company underwriting is being used more and more as a tool to predict who has a favorable risk profile, and who doesn’t.

When the economy isn’t doing well, and losses aren’t exactly slowing down (see graph illustration above) that is a recipe for higher premiums, and that’s exactly the pattern that has unfolded over the past several years.

Insurance for insurance

Insurance companies have their own insurance, called reinsurance. This is what protects the insurance company in the event they have a large number of losses in a very short period of time, and have to pay out millions, or billions of dollars in losses.

Think Hurricane Katrina, or Hurricane Sandy. When something like that happens, reinsurance companies react, and often times increase their costs. This means that the insurance company now has an even higher overhead cost, and has to decide how to handle that. Will they eat the cost with their investment revenue, or pass some of it along to their policy holders?

You can listen below to a verbal explanation of some of this as well:

Hopefully that cleared a few things up for some folks, but regardless of why rates increase, the point is that they just do.

The problem with Geico, Progressive, The General, Safe Auto, and Cure Auto Insurance

Unfortunately in the world we live in, insurance is marketed very aggressively as mere cost-cutting commodity. The exact definition of the term commodity is specifically used to describe a class of goods for which there is demand, but which is supplied without qualitative differentiation across a market.

To call insurance a commodity makes absolutely no sense at all. In fact, insurance is the complete opposite of a commodity.

Some of the big brands in our space have spent billions in marketing to send the wrong, if not an irresponsible and potentially dangerous message to the general public — that insurance is all about cutting cost.

Some companies (I’m looking at you Cure Auto Insurance) have even promoted removing the expertise of an independent agent from the equation, to “cut out the middle man”. That’s not even how it works!

Complacency is expensive when it comes to insurance

Not enough people take advantage of the fact that there are a ton of different insurance companies out there fighting for your business. This is where an independent agent is an invaluable resource. Not to mention the sheer lack of knowledge the average person has about insurance (no offense!). Cure Auto Insurance and the other companies I mentioned above, aren’t going to take the time to educate anyone, and they are only able to sell one “brand” of insurance — their own. Furthermore, there’s a great chance they don’t care about your coverage limits or protecting you either.

I’ve found that a lot of people are still under the misguided belief that the longer they stay with the same insurance company, the more loyalty, or discounts they accumulate. That’s simply not the case folks. That complacency can cost you a lot of money.

I’m not saying you shouldn’t be unhappy with a rate increase, but just know that all things are relative, and changing your insurance company every single time you have a rate increase is exhausting.

Being an independent insurance agent, I have access to multiple insurance providers and can compare your insurance coverage with the click of a few buttons to see who offers you the best possible deal. You have nothing to lose, and potentially a lot to gain.

Here is a quick conversation I had with a few of my business partners while broadcasting on 1210AM WPHT back in February, discussing how and why I’m able to quote different companies with a few clicks of my mouse.

Now that you have an understanding of why rates are what they are, and what I can do about it, it’s time to take some action is it not?

Contact me today at 484-631-0303 if you live in Pennsylvania or Delaware, and I’ll make the process easy.

Alternatively you can use my contact page to send me an email.