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Insurance

Understanding Rising Insurance Premiums: Key Factors Behind Increased Costs and Reduced Coverage

By May 8, 2024No Comments

With premiums and nonrenewals currently on the rise across almost all lines of insurance nationwide, our agents have been extremely busy working with our family of policyholders to keep them informed of why this is happening.

Below is a brief breakdown of a few key reasons for the changes. We hope you’ll find it to be helpful.

Inflation:

It’s a concept we are all painfully familiar with at this point. Inflation is the rate at which prices for goods and services increase. America reached 20-year highs in 2022. How does inflation impact your insurance premiums? Great question!

Inflation means that the cost of replacing the risk, be it a vehicle, house, or business is now more than it would have been during the previous policy terms. Therefore, the premium cost for that same level of coverage must increase to factor an accurate cost of replacement.

Increasing interest (rates):

Okay, you might be thinking, “I can understand why inflation might increase premiums for policies that cover property, but what if I have a liability-only policy?” Also, a good question. The Federal Reserve is the central banking system of the United States, and in a grand sense oversees making sure the country’s economy continues to have sustainable growth. When the economy gets funny—like when inflation increases sharply—the Fed will use the main tool in its toolbelt to address it: adjusting interest rates. The Fed has been increasing rates steadily for the last year. Where there was 0% interest rate for much of the pandemic, interest rates currently sit around 5%.

How do interest rates impact premiums and risks that an insurance company will write? Here it’s time to acknowledge a hard truth: insurance companies are businesses and businesses exist to make money. So, how do insurance companies make a profit?

Insurance companies make money differently depending on the state of interest rates and the economy. When interest rates are low, profitability comes from investments.  Money is inexpensive to borrow, which makes the return on investing that money higher. Insurance companies will write more policies to take in more premium dollars, which they can turn around and invest. Even it if means paying out more in claims than a company receives in premium. However, the script flips when interest rates increase. When the cost of borrowing money increases, the return-on-investment decreases. Insurance companies are no longer looking to make money on investments. Instead, they are looking to make money on the risks they insure.

To be profitable, an insurance company will be more sensitive to the cost of claims exceeding the premium received. Insurance companies address this in several ways, including increasing premiums or decreasing exposures by either lowering limits or canceling risks outright.

Introducing reinsurance:

This one is the most unfamiliar to policyholders. The concept of reinsurance is most certainly a foreign topic but is relatively easy to understand.

Reinsurance is nothing more than insurance for insurance companies.

Insurance, at its base level, is a contract to transfer risk. In typical insurance settings, a policyholder agrees to pay a premium to an insurance company to transfer the risk of paying for a future loss to said company. Reinsurance is the same concept. An insurance company purchases reinsurance to transfer some of the risk of the future loss to another party.

Just like inflation and high interest rates have caused premiums for regular insurance to increase, they have also made premiums for reinsurance increase. There are now fewer reinsurance dollars to go around to insurance companies. In turn, insurance companies will limit their exposure by being more selective in the risks they write, as well as how much they are charging for those exposures.

What we’re doing:

Our team wants to help you manage your insurance needs and help you secure affordable coverage. That’s why we are…

  • Continuously monitoring market conditions and talking with insurance companies about upcoming changes to pricing or coverage terms and conditions.
  • Evaluating risk management opportunities and resources to help you reduce your risk.
  • Making every effort to provide you with specialized support related to your specific coverage needs.

Our agency understands the difficulties that accompany premium increases and reduced coverage availability. We’re here to support you in navigating the current market conditions that are affecting so many policyholders.

Our staff has been working extremely hard at reviewing all renewals and is making every attempt possible to connect with you prior to your renewal. In the meantime, please do not hesitate to reach out prior to your renewal or schedule a time to discuss your options.

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