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Why Insurance Premiums Are Increasing and What We Can Do About It

While we know that prices for goods and services typically only increase – thanks inflation – this year has seen incredulous insurance premium increases for drivers, homeowners, and businesses across the country. Why is that? Let’s dive into a few reasons this has happened, and some steps you can take to offset the increase you’ll likely see at renewal.

First things first, understanding how insurance companies operate is key to understanding the “why” behind increasing premiums. Insurance companies gauge your risk – the likelihood of you having a claim – along with how much that claim is likely to be based on the cars you are driving, the type of house you’re insuring, condition of the car or house, what type of business you’re conducting, etc. They pool all collected premiums and use those premiums to cover the actual claims that happen, and what’s leftover is their bottom line for the financial year. When premiums exceed the amount paid out in claims, this results in profit. However, there may be a time when claims come closer to exceeding the premiums charged, resulting in a net loss after paying the claims and accounting for operating expenses like paying employees and benefits, brick and mortar building costs, utilities, etc. What happens when the premiums aren’t covering the operating expenses? Well, the company increases the premiums, of course. So what driving factors resulted in this year’s record high increases?

1. The Pandemic.

2020 and part of 2021 saw a drastic decrease in exposure – basically the “chance” of a claim happening – due to people staying at home, quarantining in place, and adopting telecommuting habits for work. This took cars off the road, limited people being on business properties, and in many cases kept people form even visiting family and friends, all of which reduce the number of chances for a claim to happen. Now, as we gear back towards our new “normal” and return to our offices and roadways, those exposure risks have returned, and insurance companies are struggling to keep up with the risk-to-premium ratio. As more claims are being filed due to the traffic returning – both automobile traffic and foot traffic – premiums are rising to cover the surge of claims we weren’t having at the beginning of the pandemic.

2. Supply Chain Issues.

Although another product of the pandemic, this one is important to note as it directly impacts the insurance industry. We saw rises in products and services at the markets, our produce, our dairy, our baked goods… everything. But what does the supply chain have to do with insurance? It all comes back down to the cost of goods. When you file a claim on your auto and it has to go to the shop, the parts that were once $100 now are $500. This is reflected in the total amount paid for the claim, bringing us back to the claim vs premium amounts. As the average price of a claim rises, so do premiums. The same could be said for homes, as the prices of lumber and metal skyrocket alongside our groceries.

3. Labor Shortage

Another sneaky reason for insurance premiums rising. This is related to the supply chain issued we already discussed, as a shortage of truckers is one of the big reasons the supply chain is suffering. On another hand, it is becoming more difficult to hire and retain employees, including for auto repair shops, contractors, etc. Employers are having to get creative and pay higher wages, provide better benefits, and work harder to retain employees. This all contributes to increased bottom line on a claim, thus increasing premiums.

4. The Weather

No, seriously. Especially in states like Florida or California, where hurricanes and wildfires have run rampant, the number and severity of claims has drastically risen for auto, home, and business owners. The bad weather has hit insurance companies hard this year, and that hit is reflected in the premiums we’re seeing now. Coming back to profitability, as the insurance companies are having to pay out more in claims due to weather-related losses, they have to take in more in premiums to cover those claims.

There are of course many other factors, but these are a few of the main impacts that have caused some of the biggest increases most of us have seen in our lifetime.

So what can we do to offset these increases? It depends a lot on your unique situation and the company you’re with, honestly. Some common themes are good driver discounts - meaning you’ve taken a defensive driving course recently, multipolicy discounts – meaning you have more than one policy ie your home and auto with the same company, smart technology discounts – meaning your vehicle has defensive technology like automatic breaking, security system discounts – things like a central fire alarm, burglar alarm, or even fire sprinkler system in your home, loss- or claim-free discount – meaning you haven’t had to file a claim in awhile, and a plethora of other things. Another good step is to not take your renewal at face value. Just because Company A was the cheapest rate you could get last year, doesn’t mean it will be this year. This is a great benefit of having an independent agent – they can shop for you and you can rest assured that you’re not paying more than you have to for the coverages you need. They can also help you search for company-specific discounts so you know you’ll be getting the most bang for your buck.

Are you in search of an independent agent in Georgia, Florida, Tennessee, Kentucky, Alabama, North or South Carolina, Michigan, Ohio, or Indiana? We can help! We specialize in commercial and personal insurance, meaning we’ve got an agent that can help with any of your insurance needs. Call or click today and get started with your free, no-obligation quote on your home, auto, business, and more.


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