“Why are my insurance rates going up when I have never had a claim?”

This is one of the questions that insurance agents get most often and the answer is frankly one that most people do not want to hear.  You as an insured driver or homeowner may have a policy for 20 years and never have a claim or even a speeding ticket and yet your rates may increase.

To understand this you have to understand how insurance works.  The basic principle of insurance is that a group of people pool their money together so that if a major unexpected event should ever impact one of them the money from that pool would be able to pay for it.

As a simplified example, Smiley Insurance Company has 1000 people that it has provided auto insurance for that each pay $1000 per year for their auto insurance.  Smiley has a pool of $1,000,000 from which it can pay claims.  Joe Textsalot is a client of Smiley Insurance Company and he just had an accident where he injured three people and damaged their new SUV.  The medical payments on this accident come up to $150,000 and the damage to the SUV comes up to $15,000 to repair.  The $165,000 that Smiley Insurance will pay for this accident represents 165 years of Joe’s insurance premiums, obviously more than he will ever pay.

Now if only 7 of the 1000 insured drivers of Smiley Insurance Company have accidents similar to Joe’s, the entire pool of money would be spent.  And what Smiley Insurance is selling is a contract to indemnify its insured clients in situations like these.  Smiley needs to make sure that there is money available to cover other accidents and claims and so they need to increase their rates to be sure that they have enough of a reserve to pay any claims that will come in throughout a year.  (How much an insurance company must keep in reserve is mandated by law and we won’t get into that here.)

Joe’s rates will increase due to the at-fault accident he was involved in.  But the increase in Joe’s premium is not enough to cover the payout.  So while Joe’s rate may increase 25%, Susie Gooddriver’s rate may increase 5% as well because all of the good drivers and homeowners who do not have claims have to help keep that pool funded.

In another example, Susie and her family are out of town visiting the grandparents and their home is struck by lightning which causes a fire.  The fire does enough damage to the home that it needs to be rebuilt completely.  Susie’s home costs $300,000 to rebuild.  In addition to that, Susie’s family lost all of their possessions and Smiley Insurance pays them $150,000 to replace everything.  Susie’s family also needs a place to live while their home is being rebuilt so Smiley Insurance pays them $50,000 to rent a home while they wait for it to be completed.  Altogether Smiley Insurance pays Susie and her family $500,000.  Susie had been paying $1000 per year for her homeowner’s insurance, so it would take another 499 clients like Susie for Smiley Insurance to pay for this claim.

While these examples are hugely simplified the fact is that auto and home claims in the insurance industry are increasing not only in frequency but in dollar amount.  Distracted driving (especially texting while driving) is causing auto accidents at an unprecedented rate.  Medical payments are also increasing greatly especially with the increase in pain management plans and therapies.  Repairs to vehicles that used to cost a few hundred dollars are now costing thousands of dollars due to the technology integrated in vehicles.  Hail damage has been a huge issue in the midwest in the past few years resulting in multiple “catastrophes” that damaged homes and autos.

Insurance rates are going up.  It is an unfortunate fact but it is a fact.  Sometimes your agent may be able to find a way to help you offset this increase and sometimes they will have to tell you that there is nothing they can really do about it even though they would like to.  If they are able to lower your rates be sure to ask them exactly what they did to do so.  Sadly there are some agents out there that will lower coverages or remove them entirely to reduce the premium and not explain what they did.  If you encounter this situation it might be a good idea to have another agent review your policy (such as getting a Farmers Friendly Review here).  Cheaper insurance is not always better or even equal insurance.