Let’s take a minute to talk about insurance rates. Watching the sun come up over Table Rock Lake this morning (Saturday 6/25), sitting in the stillness of the early [very early] morning hours I’ve had some time to reflect on life and business. I am truly blessed with a healthy, happy family. Our son is now 3 and boy are our days filled with all sorts of craziness! I think about all the things we have done in his life so far and I also think about all the things I can’t wait to do with him. As I think about the future, I find it hard to look much outside of the present day and time. I know the extreme prices of life’s essential items are taking a toll on all of us today. It seems like every time we make a trip to the grocery store or fuel pump the prices keep getting higher. That fact also rings true across every good and service in today’s market. Insurance is no exception. Full disclosure, I am in no way advocating that consumers should make their insurance decisions solely based on price. That is another blog for another day!
Before we talk about rates, it’s important to understand some of the basic principles to how your individual rates are determined. While it is true that the type of vehicle and level of coverage you pick play a part in the pricing… it’s becoming less prominent in that decision. There are literally dozens of bits and pieces of information that insurance companies use to assess your individual risk. Things like credit, length of time with your current carrier, number of accidents, number of claims in general, number of infractions on your driver’s license, the current liability limits you carry, the number of drivers in your household, the age of each driver, if you have had any recent lapse in coverage, your bill payment consistency, etc., etc., etc. The list goes on! For making this easier to talk about, I refer to all these combined risk factors as your “insurance score”. Much like your credit score, this number is different for EVERYONE. That is why talking to a neighbor or friend and comparing rates on similar houses and vehicles doesn’t work any longer. It’s just like credit. You and I won’t get the same exact loan offerings or credit limits offered either. Everyone presents their own unique risk.
Although we are all familiar with changing insurance prices in the last few years. The ups and downs of that cost becomes a bit overwhelming at times. I find myself asking, why? Let’s face it, if I am asking that as the insurance agent, I know that everyone outside the insurance industry must be asking the same thing! In my quest to answer this question I do find some obvious arguments, and some that are a little less public knowledge. So, without further a due, let’s dive in.
First, lets start with the simple reasons. Think back to 2018/2019. Life was good it seemed. Cost of fuel was down, groceries were plentiful and priced fairly, and in general family activities didn’t require a second mortgage. Insurance rates were also seeing the benefit of these good times. After a rough stretch in 2017, premiums were finally leveling out and for the most part becoming stable. Now think back to 2020/2021. Covid hits. The country is shut down and most of the nation is sent into a “work from home status”. Traffic levels fall drastically, and the number of accidents decrease with the lack of traffic on roadways. Many of the insurance companies during this time lowered rates on top of giving back some refunds to customers. Time goes on and the effects of shutdowns, staff reductions, and a lack of efficiencies in the new “work from home” culture (among many other political factors we won’t discuss) start to show their bad side effects. Goods become hard to get. There are shortages of all sorts of products. Supply and demand kicks in and prices begin to rise. Moving into late 2021/2022 inflation hits an all time high. It now costs double or more to do the same work or purchase the same goods we were buying just a short time ago in 2019-2020. It now cost 40-60% more to repair or replace vehicles. So, to answer the biggest part of the question, why are insurance rates rising? It’s rather simple business. The cost of the services we (insurance companies) must pay for during claims has increased dramatically, therefore our prices must increase to remain in business. This principle applies to ALL types of business. After all, there isn’t much these days that either hasn’t changed price or has gone down in price.
Second, let’s dive a little deeper into the business aspect of it. Again, our cost of business has increased rapidly so we must adjust accordingly. This is also exaggerated by what I mentioned earlier, that is, the price reductions and kick-back customers received during the early part of Covid. When comparing rates prior to Covid, the increases we are seeing now are not as dramatic. But let’s get back to my second part. This has to do with business operation in general. The basic formula to business survivorship is:
my materials and incoming cost [X] PLUS my mark-up/labor rates [Y] EQUALS market price of my good/service [Z]. X + Y = Z.
What is changing now in the market is the X factor. What it cost businesses to either produce their service or product has severely increased. Most businesses today have not increased their Y factor at all. The insurance industry in general has taken a big loss in the last 2 quarters simply due to the rapid inflation with little to no warning. Just as any other business, we have 2 choices. A) go out of business or B) raise rates to account for the inflation. There is a lot more detail to what is used for rate determination of course, but for now we will keep it to the basic.
Last, and often a cost factor that is overlooked when it comes to insurance, are medical expenses. We mostly think of vehicle cost and repairs when we consider our insurance policies. Truth is, that’s only a small portion of what insurance companies pay out during claims. Legal fees and medical bills play a very large role in how rates are determined. And, you guessed it, those cost have also risen dramatically.
These are just a couple of the contributing factors when it comes to your insurance premiums. There are many other smaller, more intricate details that must be accounted for like rising lawsuits accompanying auto accidents with injuries, increased accident volume, etc. Talking to your agent can help you get a bead on reasoning for your specific company’s increase(s).
One final thought I’d like to add to the mix. Consider a local agent if you find yourself shopping. We all know there are plenty of online offerings for insurance, but where does your money go when you pay them? Shopping local gives you and in-person and available agent for starters, but it also helps to keep a local small business alive. Plus, most local agents will be spending their money with other local businesses and supporting your local schools/charities/etc. I hope if you’ve made it this far in the article you now have a better grasp on some of the reasoning behind rising insurance rates. But if not, please reach out to your agent or me…. I’m happy to give you my 2 cents on the matter and even review your current policies if needed! – Cody