It seems like no matter where you look, insurance prices keep climbing. But why? Let’s take a closer look at the reasons behind the rising insurance rates, breaking it down into pieces that are easy to understand.
So, Why Are Rates Going Up?
Mother Nature’s Mood Swings
One of the biggest reasons insurance rates are rising is because of natural disasters. Whether it be floods, tornados, Derechos (widespread, long-lived wind storms), hurricanes, or wildfires, insurance companies have had to pay a lot of money to cover these weather-related damages. And it’s not just one area; these events are happening more frequently worldwide. So, to prepare for the next “big one,” insurance companies raise rates to build up their financial safety net known as reserves.
Cars Getting Smarter (and More Expensive to Fix)
Cars today are basically computers on wheels. They have sensors, cameras, and technology designed to keep you safe and make driving easier. But all these high-tech features come at a cost. When accidents happen, repairing or replacing these smart components is more expensive. So, auto insurance rates must increase to keep pace with the more costly repairs.
Living in a Lawsuit-Happy World
We live in a society where legal actions are pretty common. If someone gets injured or property gets damaged, lawsuits can follow. For insurance companies, this means they have to pay not just for the damage or injuries but also for legal costs. These expenses can be huge, and as they rise, so do your insurance rates. Juries are rewarding plaintiffs with larger and larger settlements, which also increases the likelihood of an insurance company settling a case before it goes to trial.
Better Safe Than Sorry
Another reason for higher rates is that insurance companies must be extra careful. They need to ensure they have enough money to cover all their customers’ claims. If they do not, they will be downgraded by rating companies that look at a company’s exposures and their reserves and assign a financial stability rating. Reinsurance costs continue to skyrocket. Most every insurance company purchases insurance over their book of business to assist in catastrophic claim events. These costs have gone up considerably, at the same time the amount the insurance company must cover themselves has increased dramatically. For example, an insurance company that paid the first $10 million of a catastrophic event must now cover the first $30 million before reinsurance covers the rest.
The Domino Effect of Economics
Everything is connected to our economy. When the cost of living goes up (think about how much more you’re paying for groceries or clothes), the cost of doing business for insurance companies also increases. They have to pay their employees more and spend more on office supplies and everything else they need to run their business. These costs eventually trickle down to you through higher insurance premiums.
What Can You Do About It?
Knowing why rates are increasing can feel a bit overwhelming, but there are things we can do to manage those costs. For example, we can shop around for the best insurance rates. You can also do things to help, such as maintaining a good driving record if it’s car insurance or raising deductibles on policies and self-insuring smaller claims. In most cases, you can also bundle different types of insurance for a discount.
Wrapping It Up
Understanding the factors that drive insurance rates up can help you and your family make more intelligent decisions regarding your insurance. Just like any other financial decision, the more you know, the better choices you can make. And who knows? With the correct information and working with your independent insurance agent, you might find ways to keep those pesky insurance rates in check!
If you have questions regarding how to maximize your insurance dollar, feel free to give us a call.
