Insurance Rates Explained

The insurance industry is in an unprecedented time lately with having to deal with the response to rising inflation.  Now more than ever, you should be watching what is happening to your insurance rates.  We will discuss in this article just why insurance rates seem to be increasing lately and what some of these driving factors are.

We are all experiencing a decrease in how far our dollar goes lately.  We feel it at the gas pump, in the grocery store, when we buy a car, heat our homes, and when we book that much needed vacation.  It is painful to to see what we can buy this year compared to last year.  Even Dollar Tree announced that they will now be selling their $1 products for $1.25. 

The news tells us that inflation is at the highest level (8.5% in March 2022) in 40 years.  I don’t know about you, but I feel like many things are way higher than 8%.  Some things yes, but others feels more like 20-30% higher.

The Consumer Price Index (CPI) measures inflation year over year on the average price paid for consumer goods and services.  This is an average across the nation and doesn’t account for regional differences in prices.  When you look closely at the breakdown of what is included in the CPI, you see a major variance in certain items against others.  For instance, as of the time of this writing, we see the rate for food up 7.9% which is the same as  the overall rate of inflation.  Gasoline for our vehicles, on the other hand, is up 38%.

For the sake of this article, we are looking at how inflation affects your insurance rates so we will be focusing on the main drivers of what impacts insurance.

Inflation Rates on Insurance Related Items

  • Used Cars and Trucks  41.2%
  • New Vehicles  12.4%
  • Motor Vehicle Maintenance and Repair  6.3%
  • Residential Construction  14.8%
  • Wage Offerings 6%

The cost of these mentioned items drive up the cost of your insurance rates directly.  Comparing these items to the 30-year average for inflation which is 2.49%, and you can see why things are out whack at this current moment.  Insurance was designed to spread the risk, so even if you have not had a claim recently, your insurance rates are impacted by those who have had losses.  When these losses occur, there is a much higher cost to the insurance company to put the insured back to where they were before they had the loss.

Some other factors that are driving up the costs of insurance carriers in settling claims are below.  These all play a factor in pricing and how carriers are forced to raise premiums so they can still make a profit.  After all, if insurance companies don’t make a profit, then they go out of business which lowers the amount of competition which in turn raises rates even higher.

Insurance companies pay close attention to their loss ratios.  That is the ratio of premiums taken in compared the claims paid out.  If this ratio goes up due to higher losses, they must make the difficult decision to raise premiums accordingly to bring the loss ratio back down.  In some cases companies can run with loss ratios above 100%, meaning they pay out more in claims than they take in from premiums.  Obviously they cannot sustain a loss ratio like this for long.

Additional Influences on the Cost of Settling Insurance Claims

  • The Wage-Price Spiral- This is an economic term that explains the increase in prices as a direct result of higher wages.  When workers make more money, they have a demand for more goods and services which in turn, causes an increase in prices.
  • Increased Wage Payouts for Workers- The more a company has to pay their workers to produce a given product or service, the more this increase gets passed down to the customer.
  • Level of Construction Activity- When construction activity is high, there is a greater opportunity to submit estimates for work and these bid margins tend to be higher.

Let’s give some examples of why insurance carriers see increased loss ratios and how they must respond to these increased costs.

Example 1:

George has an accident on the highway on his way to work.  He has not sustained any injuries but his vehicle is a total loss.  When his insurance company issued the policy he was under, they based the premium on the value of the vehicle at the time the policy was taken out.  Since that time, the value of his vehicle has shot up 40%.  The insurance company must take the hit and replace his vehicle per the terms of the policy.  The insurance company will take the financial hit for not taking enough in rate to cover the amount of the loss.

Example 2:

Anita has a fender bender in a parking lot and has to have her vehicle repaired.  She has called multiple body shops and the closest one is 3 weeks out in being able repair her car.  She will be forced to drive a rental car while the car is being repaired with a rental car company who just had to raise rates due to the cost of their inventory being so much higher.  The body shop has raised their pricing because of the cost of their labor going up 10%.  With so few body shops being able to repair the vehicle due to unusually high demand, she has no choice but to pay them what they are asking.  Her auto insurance company has to pay these inflated costs to settle the claim.

Example 3:

A burst water pipe has caused significant damage to Bob’s home.  He will have to replace his flooring and several walls.  Due to higher than normal demand and not enough contractors, the labor cost has increased 20% on all of the estimates to complete the work.  The flooring to match the rest of the home is on a 2 month back order and the cost of lumber is up 42%.  All of these items has taken a claim that would have settled for $32,000 a year ago cost $49,000 today.  The home insurance company has the dwelling limit down about 20% lower than it should be because inflation has risen drastically so quickly.  The insurance company will pay this price for not taking enough premium on this risk.

OK, so the bad news is insurance rates are higher.  You have a better understanding now of why they are.  That still doesn’t help you with how much money you see going out of your bank account to pay the premiums when you haven’t had any recent claims.  So what do you do about it?  The way I see it, you have 3 choices.

  1. Grin and bear it.  Break out that wallet and just pay the higher premiums, hoping that one day they will come back down when this whole inflation thing gets under control.
  2. Self Insure.  You can pay cash for your car and home so there are no bank requirements to insure them.  Then you pray really hard that nothing happens so you don’t end up in financial ruin if it does.
  3. Talk with your agent on what your choices are.

I’m going to guess that the best option for you is option 3.  I will tell you what we are doing for our clients and have done since we have been in business.  We have systems in place to track our client’s renewal rates.  When a threshold is met for increased premiums, it triggers an action for us to shop out all of the insurance companies to make sure they are still with the best insurance company for them.

We like to stay in contact with our clients to make sure that their needs are being met and that we are still getting them the best premium and coverage options available. 

Ways to Save on Insurance

  • Have your insurance agent shop out your policies to make sure the insurance company you are with is still giving you the best premium.
  • Consider raising your deductibles.
  • Bundle your home and auto insurance when possible.
  • Consider not filing small claims that may end up impacting your insurance rates later.
  • Make sure you are receiving every possible discount you can on your policies.
  • Lock in your auto rate for a year if possible.
  • Ask for a policy review to make sure your policy matches your needs.

I hope this article has helped explain the squeeze on the consumer lately on insurance and gives you an idea on some things you can do about it. Please feel free to reach out to us with any questions at 704-494-9495.


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