Why Are My Rates Increasing? I Haven't Had Any Claims!

Insurance companies use various factors to determine the rates they use, and rate increases often have very little to do with you, personally.

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 happens when your rates increase even though you've been a perfect angel this year? That is not an easy question to answer, because it could be one or a combination of the many factors that decide your final insurance premium:

Inflation: 

Insurance, just like everything else, 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.  

Location: 

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 they are to be affected by certain perils (hail, wind, snow), and then they have to predict the losses for the coming year. From these calculations and predictions comes your location-specific rate.

Example:

Let’s 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 their higher location rate for Omaha than Lincoln's. 

Demographics: 

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: knowing nothing else, would you rather loan your car out to a sixteen-year-old boy, or a thirty-year-old mother? 

Financial Score: 

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, they have found that the higher the credit score, the lower the risk.

Legal Expenses:

Having a lawyer isn't cheap. Having them defend you in court isn't cheap either. 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 dollars. Insanely high awards are becoming more common, and all of the fees leading up to the final decision are increasing as well.

Litigation Frequency: 

Compounding the problem with Legal Expenses is the frequency of law suits. The lawsuits keep coming, and keep getting more expensive. We've gone from suing over coffee to suing for baking neighbors cookies. With an overly litigious society comes an even larger tab left for the insurance industry to pick up. 

Insurance and the Law of Large Numbers:

Insurance itself is simply having a large amount of people pooling their money together, and having the insurance company use that money to pay off people's claims. With the Law of Large Numbers, actuaries can accurately measure how many claims they'll have and how severe those claims will be. Then, along with their other calculations, they use that information to determine how much everyone has to pay.

Medical Expenses: 

Another trend is the ever-increasing prices of medical care. Going in to get that cough looked at can easily cost one 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.

Rebuilding Expenses:

The market value of your home or office building and the amount it would cost to replace it after a claim are very different values. Replacing or repairing a building costs far more than it did when it was originally built. These increased costs increase your rates.

"Hardened Market": 

Nationally, the insurance market fluctuates, and it has periods of being “Hard” and being “Soft”. A soft market occurs when an insurance company builds up enough profit that they decide to take market share by aggressively advertising and cutting insurance rates. In order to keep up, the remaining companies start doing the same. Eventually, you have companies with extremely low rates and companies who accept anyone, regardless of their claim history. That type of operation ends up with too many claims and poor profit margins for the insurance companies, so then they'll be forced to increase their rates and restrict the types of people/operations that they'll insure. That type or market is a hard market. (We are currently in a hard market)

Note from the Author (Nov. 14, 2014): After two years of work, we've entirely redesigned our website! Using SquareSpace, we were able to import this blog and we are continuing our blog there. To find the current version of this article and our new articles, click HERE.