A long list of factors go into calculating insurance premiums, and each insurance carrier uses a slightly different set of factors, assigning each factor a different weight. While having a claim will most likely raise your rates, year-to-year rate increases are a normal thing, and often have very little to do with you, personally. This article will discuss a few factors that affect every carrier's rates.
Everyone knows a bad driving record or a hail loss on your home is going to make your rates go up; that’s to be expected. But what about the times when your rates increase even though you've had a perfect, claim-free year? That is not an easy question to answer, because it could be one or any combination of the many factors that decide your final insurance premium:
Insurance is subject to inflation. Insurance companies are just like any other business; they need to make a profit to stay afloat. So when the costs of things go up (rent, labor, utilities, etc.), the cost of your insurance has to go up as well.
Actuaries are the ladies and gentlemen behind the scenes who crunch the numbers and come up with rates. These folks use location specific data for part of the rate calculations, which create different rates for different areas. They compile the loss information from an area, such as how likely the area is to be affected by certain hazards and perils (hail, wind, snow), and then they have to predict the losses for the coming year. From these calculations and predictions, they decide the location-specific rate.
Example: Compare Omaha, NE to Lincoln, NE. Omaha has been hit with far more severe storms over the past few years, costing Omaha-insurers millions of dollars to cover the wind and hail losses. So you’ll find insurance rates are higher there than in Lincoln, simply due to more severe weather. Similarly, Omaha has higher rates of crime (vandalism, insurance fraud, arson) which increase the chance of loss to property. They also have a significantly higher population than Lincoln, increasing the chance of auto accidents. All of these uncontrollable factors add up to a higher location rate for Omaha than Lincoln.
Similarly, actuaries divide the population between males and females, ages, education levels, marital status, years licensed, etc. They have access to statistical data that provide an insight into each of the different demographic segments, and how risky insuring each is. A good example is this: would you rather loan your car out to a sixteen-year-old boy, or a thirty-year-old mother?
A little known rating tool of insurance companies are your insurance-specific credit scores. They have found that using your credit history is a good indicator of how good of a risk you are. While it may not be true for everyone, as a whole, there is a correlation between the credit score and the likelihood of an accident occurring. They have found that the higher the credit score some has, the less likely they are to have a claim.
Consulting a lawyer could cost a couple hundred dollars. Having them defend you in court is going to cost far more. After attorney fees, court fees, bonds, rewards, and penalties, that leaves a hefty tab to pick up. Everyone remembers McDonald’s Hot Coffee lawsuit of 1994 that was initially settled for $2.86 million. Insanely high awards are becoming more common, and all of the fees leading up to the final decision are increasing as well.
Compounding the growing costs of legal counsel is the frequency of lawsuits. America is a very litigious society. We've gone from suing over coffee to suing for baking neighbors cookies. With an increasingly litigious society comes an even larger tab left for the insurance industry to pick up.
Another trend is the ever-increasing prices of medical care. Getting a cough looked at can easily cost a hundred dollars, plus a thirty dollar prescription. So you can imagine what it would cost to fix-up a house guest that accidentally slips and breaks their arm.
Hard and Soft Insurance Markets:
Everything operates in cycles. For insurance premiums, they have cycles of being hard and soft, depending on the current market. A soft market occurs when carriers are aggressively trying to grow, accepting increasingly riskier customers while cutting their rates. After enough time, the carriers inevitably start to lose money and start to restrict the types of new customers they'll accept, and will start to raise premiums. This market correction is the beginning of a hard market. Eventually, a carrier will build up enough capital and try their luck with cutting rates and reducing restrictions...and the cycle begins anew.