sticky notes with auto, home, umbrella illustrations

Before we dive right in, we want to first touch on how rates are determined.  Insurance can be complex and frustrating, so we hope to provide a little bit of clarity.  It’s common to be confused by the following: Homeowner A and his/her neighbor, Homeowner B, both owning similar homes, are paying very different insurance rates.   Driver A, with two teenage drivers, pays much more in premium than Driver B, with two teen drivers.  What gives?  How are insurance rates calculated and what factors are affecting these rates? 

How Are Insurance Rates Determined Anyhow?  

Most insurance rates start with statistical analysis and mathematic calculation.  Actuaries use historical data and the cost of past losses by groups of consumers with common characteristics, to help develop base rates for these consumer segments.  These base rates are then provided to underwriters to shape the final rate.  Underwriters take base rates and factor in more individualized characteristics of policyholders.  Once Underwriters factor in more specific variables to estimate the expected value of any future losses, a premium is charged that corresponds with the level of risk that a policyholder represents.    

These predictive and risk-based rates help to protect consumers.  Historically, this method of rating has proven to be an incredibly accurate predictor of future losses, which ensures that an insurance carrier can pay on potential claims and, of course, earn a profit.  

When rates do not correspond with the potential for risk, the long-term outcome can turn bad for a carrier and/or the consumer.  In these cases, insolvency can be in the future for the carrier, leaving claimants without a remedy.  Another outcome can be unanticipated and often very large rate hikes to consumers.  It's always best to avoid carriers that can provide rates that "seem too good to be true."  These carriers may not be adequately rating and can eventually run into problems.  Choosing based on strong financial rating history and more gradual, steady changes is generally best. 

Below we’ve listed just a few rating factors, pertaining to home and auto insurance, that often go into the equation of calculating premium rates.   

Annual statistical data regarding claims frequency, severity, 
and cost by geographical location and other factors
Current cost of materials & labor
Consumer level of education and type of occupation
Consumer age, gender, marital status
Personal driving history 
Property’s protection class 
Property type, age, structure, condition 
Vehicle age, make, model 
Personal insurance scoring (comprised of credit scoring and other factors)
Personal claims history 
Property’s claims history
Personal payment history
Prior coverage, longevity with carrier

Since some factors are more individual, consumers can certainly affect their own rates in either a positive or negative way, even if rates are rising across the board.  For example, let’s use the earlier two homeowners with similar homes paying completely different rates.  Homeowner A is paying less than Homeowner B.   You would assume that since both have similar homes and live in the same geographical location, each would be paying similar rates.  

However, Homeowner B may have a poor loss history, low credit/insurance scoring, or no loyalty discounts applied.  Or possibly, they are not eligible for other discounts that apply to Homeowner A’s house like a security system or upgraded electrical or roof.   There are so many reasons why their rates could vary even if they have some similar characteristics.  

We can even take a crack at reasons behind why Driver B pays more than Driver A.  Possibly Driver B’s driving record isn’t the best.  Possibly Driver B’s kids aren’t eligible for the good student credit and Driver A’s kids are.  Again, so many reasons.

What Trends Are Affecting Overall Rates?  

Now that we have a basic understanding behind the premise of insurance and how rates are calculated, we can briefly touch upon factors that are affecting overall rates on products like automobile and homeowner’s insurance. **    

Home Insurance:

Claims Are Climbing: The average cost of a homeowner’s claim is up more than 1/3 since 2011.  
The Scoop on Material & Labor: There is a significant increase in materials and labor, making it costlier to indemnify a claimant.  Breaking it down ever further, Chubb Insurance recently provided an analysis on construction costs which revealed that metal products are up 11.4%, wood products are up 7.25%, petroleum products are up 1.0%, and gypsum products are up 7.0%.  See the full report here.  
It’s a Very, Very Big House: The average size of a home has increased almost 30% in 25 years, spiking in 2010.  Homes are bigger in size and are also built with higher-end features, which drives up the cost to replace.   
No Shortage of Storms: There were 16 storms and climate disasters in 2017 that surpassed $1 billion in damage in the U.S. alone

Auto Insurance: 

Distracted Driving: This dangerous activity continues to be an unresolved problem, increasing the amount of accidents on roadways.
When the Cost of Gas Is Lower: When gas prices are lower, drivers tend to put on more miles, resulting in a higher probability of accidents, which is then factored in as change that affects all drivers when it comes to rating.
Medical Costs Keep Rising: This makes claim payouts for injured parties much costlier.
Bells & Whistles: New cars with more advanced technology equate to higher repair cost.  Now a dented bumper means you may be faced with also fixing or replacing a camera/collision avoidance system sensor, too.  

What Can You Do to Help Keep Your Insurance Rates In Line Without Compromising Your Coverage?  

Download A Dozen Ways to Safely Save On Insurance.

For further questions, please call V.F. McNeil Insurance (203) 481-2684.  
**Bullet Points Gathered by Hanover Insurance