Why Would That Happen?
- They simply increased the price!
- Claims reserves are low!
- Are they giving you enough credit?
- Have you eliminated the usual suspects, like a different vehicle or a new address?
Lots of people end up in a situation where they’re scratching their head in confusion at renewal time, because their car insurance policy went up for what seems like no reason. There are many factors, of course, but assuming they haven’t changed, it’s time to look at a specific few to see why your policy went up.
First, make sure you’re comparing apples to apples. Are you at the same location? Did you add a driver? Did you add or change a vehicle? Is your coverage the same as it was? Has your driving record changed? Of course, those are all reasons your insurance policy goes up, but they’re also reasons that are usually obvious when you start thinking about why your insurance went up at renewal.
Let’s look at a few things you might not have considered that can change the price of insurance at renewal.
Reason #1 – Insurance Goes Up When They Simply Increase The Price Of Insurance
Sometimes, insurance companies revise their rates. When an insurance company has a rate adjustment, it’s almost always upwards. In some states, those rates have to be approved by the state as “reasonable.” In other states, like Texas, there’s a concept called “File and Use.”
File and use is exactly what it sounds like – the insurance company raises the rates, files the new rates with the state, and uses them while they’re under review. That review is often a lengthy process, because insurance rate filings are complex documents. It’s possible the state could deny the increase after the fact, resulting in a refund for some people.
We can think of a very, very few instances in recent memory where that has happened. If the rates are not approved, the insurer will absolutely give you a refund. The majority of the time, however, the new rates are approved and you’re stuck with paying the higher rates or shopping around.
This can be motivated by profit, such as in a case where stockholders or analysts are expecting a certain set of financial results from the company. But file and use or not, insurers also can raise rates on certain types of business because that’s not the sort of policy they aim to write.
We can think of one company whose underwriting standards in some states mandate that the insured must be over 25 years old. In states where they’re not able to do that, however, that company simply prices themselves out of the market because their rates are so high for that demographic. Either way, they’ve accomplished the goal of choosing the type of business they want to write. You also can choose not to do business with them, if they use tactics like that.
It’s very rare for a car insurance carrier to go to the state and ask permission to drop their rates. These rate adjustments are used to offset increase loss costs across the population, inflation, and lower than expected return on investments So, if the cost of your policy goes up for no reason this might be one of the reasons. It could well be a function of the general climate of risk, increased costs of doing business, or the new Mercedes the CEO is driving. We jest, of course, about the Mercedes.
Reason #2 – Insurance Goes Up When Cash Reserves Need To Be Increased
Car insurance companies are required to keep a certain amount of money in reserve, in order to pay unexpected claims that may arise. Sometimes, rate changes will be because they need or want higher amounts of money in reserve. Recently, the state of Texas shut down several carriers that didn’t have sufficient reserve to pay claims. Santa Fe insurance is an example of one. The state took control of the company and paid claims from prior to the effective date of receivership. Obviously, that’s a bad thing and one that insurance companies want to avoid. Raising rates is one way to increase those reserves, in order to ensure the future financial stability of the carrier.
For what it’s worth, Santa Fe was not rated by any ratings agency, which meant that their financial condition was largely unknown to the public. Anyone without the letters CPA behind their name wouldn’t have had a hope of navigating the financial statements in order to determine what kind of shape the company was in. Always, always, always make sure your insurance is from a company that has volunteered to submit to ratings from an independent agency, like A.M. Best. We are aware of one very cheap non-standard carrier which has actively resisted being rated, and there are others out there. Please be cautious – your agent should be able to tell you the rating of a company, or you can look it up online.
If your insurance policy goes up, it may be to make sure that the company has sufficient reserves after a significant increase in claims in a given prior year, or just because the company has taken on additional risk and needs additional reserve. It could also be because something external has changed that has led the actuaries to change their calculations on the amount of risk that current policies present.
One example of an external increase in risk that could drive an increase in reserves – or a rate increase because of additional risk – is finding out that a particular town is about to install several roundabouts. One city in the midwest had a multi-year project to do exactly that, because overall they reduce accidents in the long term. However, they often increase accidents in the short term as people learn to navigate them. Multiple years of construction also increase accidents. The city decided to put in one roundabout at a time, so they had long term construction, then a new roundabout that people weren’t yet used to, then more construction… You get the idea. This extended over several years, creating a material increase in risk for auto policies in that particular city.
Since they can’t tell their customers not to make any claims for a period of time, the two most common options to increase the reserve are high yield (and therefore high risk) investment of that reserve or raising rates to contribute more money. In that way, car insurance is not unlike a pension fund that’s expected to have a certain amount of money on a certain date based on how much was paid in. Raising rates is, in some ways, a better outcome than high yield investments. Would you buy bonds from Argentina or Greece these days? Sure, the interest rate is high, but so are the chances of default and loss of all invested capital. Raising rates at least doesn’t put paid in capital in the reserves at risk.
Reason #3 – Insurance Goes Up If You Have A Change In Your Credit
Another reason car insurance can go up for no apparent reason is when the named insured has had a change in their credit. Insurance scores are used by many carriers to rate policies. This is a number derived from the insured’s credit, and which is allegedly predictive of how risky a driver or homeowner is. There is some debate surrounding the use of these scores, and three states do not permit their use in rating or underwriting. For those in the other forty-seven states, it’s a fact of life that your credit will impact the price of you car insurance. There are a very limited number of states where re-scoring at renewal is prohibited unless the insured requests it, but chances are good that you don’t live in one and the re-scoring is automatic.
Not all carriers use them the same way, nor do all carriers even score different credit events the same way. The predictive models are developed either by a third party like Lexis-Nexis, or in house by the insurance carrier. Effective Coverage has spent years working with numerous carriers and knows which carriers weight the insurance score heavily, and which ones are more tolerant of certain credit events. A bankruptcy could make you ineligible with some carriers, but it could make you the ideal customer to other carriers.
The slightest change in a credit history could cause a policy to go up for no reason. Team Effective Coverage understands that bad things happen to good people’s credit, and we understand that when bad things are happening to credit is when people can least afford for their car insurance to go up for no reason. If you had the extra money to pay for the increased premium, well, you probably wouldn’t be having credit problems.
Effective Coverage will review your insurance score and get you into an affordable car insurance policy with an insurance company that’s willing to work with your insurance score, and that understands there’s more to a person or a driver than just a number that indicates their risk. Effective Coverage understands that things like divorce can lead to credit events that will impact your rate negatively, but that may not entirely reflect how risky you as a driver are. We can even work with some carriers to waive the impact that this life event has had on your pricing.
So if your company has simply increased the price of your policy to drive their profits, wanted to capture a higher portion of revenue in reserves, or increased the price because of the mysterious impact of your credit score its time to take action!
Now that you’re aware that sooner or later you’ll be impacted by a rate increase, you have a couple of choices. Either you can call around to a dozen insurance companies, or you can just call (800)-892-4308 or click above and get the best price and the best coverage. You don’t have to suffer with your insurance policy going up for no reason!