The most asked question I get as an insurance broker is “why did my premium go up?” Many times this question is asked by a person that has good credit, hasn’t filed a single claim and pays their premium on time. It’s normal to feel “punished” when you see your rates increase in spite of you not doing anything directly to cause that increase. So why is this happening? Let’s briefly look at how insurance works in a very simplified way. Insurance policies are essentially risk pools whereby millions of people are pooled together. This creates a fund where claims are paid out of. You pay your premium, the insurance company takes a portion to pay for administrative costs and the other portion is put into reserves or savings to pay claims. As claims start to come in, that reserve starts to deplete and the insurance company runs the risk of not having enough to pay out claims. Instead of raising rates just for the people that filed claims they raise the claimants premium significantly and then spread the rest of the required premium to keep reserves full over the rest of the group as proportionately as possible. If they raised the rates just for the people that filed claims then those people would not be able to afford insurance and they would take their business elsewhere and the risk pool would miss out on the premiums needed to refill the reserves.
An additional component of premium increases has to do with inflation. At the time I am writing this article inflation is close to 8% but during a normal economic market it should be closer to 3.5%. Inflation affects the cost of building materials and auto parts. So if it costs more to rebuild your home today or fix your vehicle the insurance company will also have to increase rates to adjust for inflation. Home policy premiums typically increase year after year because the insurance company is also increasing the coverage on your home to adjust for ever increasing inflation. Most companies cap this amount after a few years but if it keeps increasing it might be time to shop around.
Recent worldwide losses have created a crisis in the reinsurance market. Reinsurance is where insurance companies go to obtain insurance to cover your risk. So if there are a lot of natural disasters then the cost of reinsurance increases which also raises your rate. We are operating in a global economy. World events have a direct impact on your home, auto and business insurance. This is the simplest way I can explain the enigma of increasing insurance rates.
I hope this helps! Please contact us if you have any questions or if you would like to have us shop your policies.
