Many people are confused to see a price increase on their insurance renewal. There’s always a reason when an insurance policy rate increases.
Why Would Your Insurance Policy Increase?
- Recent changes, like a different vehicle or a new address
- The insurance company simply increased prices
- Claim reserve funds are low
- You’ve had a change in credit
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 why this would happen, so let’s take a closer look 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, for example) 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 only a 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 paying the higher rates or shopping around.
Rate increases can often 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 depending on the sort of policy they aim to write.
For example, a company may have underwriting standards that mandate an insured must be over 25 years old. In the states where they’re unable to mandate this age requirement, the company can simply price themselves out of the market with extremely high rates for this age demographic. Either way, they’ve accomplished the goal of choosing the type of business they want to write. If a company chooses to use tactics like this, you can choose not to do business with them.
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 increased 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 Claim 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 arise. Sometimes, rates will change because a company needs to maintain higher amounts of money in their reserve.
Common Methods Used to Increase Reserve Funds
- high yield (and therefore high risk) investment of the reserve
- raising rates to contribute more money to the reserve fund
Raising rates is, in some ways, a better outcome than high yield investments. Would you buy bonds from Argentina or Greece these days? The interest rate is high, and so are the chances of default and loss of all invested capital. Raising rates doesn’t put paid capital in the reserves at risk.
If an insurance company has taken on additional risk, or a seen an increase in claims from a prior year, they may raise their rates to ensure sufficient reserves. Or something external can change, leading actuaries to increase calculations on the amount of risk presented on current policies.
One example of an external increase in price could be a town’s plan for infrastructure projects. One city in the midwest had a multi-year plan to install several roundabouts. New roundabouts can often increase accidents while people learn how to navigate them, and multiple years of construction also increases accidents. This city decided to put in one roundabout at a time, so they had both a long-term construction project and a new roundabout system that people weren’t yet used to. This project extended over several years, creating a material increase in risk for auto policies in that particular city.
Recently, the state of Texas shut down several carriers that didn’t have sufficient reserve funds to pay claims. Santa Fe insurance is an example of one. The state took control of the company and paid outstanding past claims up to the effective date of receivership. Obviously, this situation is less than desirable, and one that insurance companies want to avoid at all costs. Raising rates is one way to increase those reserves, in order to ensure a carrier’s future financial stability.
For what it’s worth, Santa Fe Insurance was not rated by any rating agency, meaning their financial condition was largely unknown to the public. You should always make sure your insurance is from a company that has volunteered to submit to ratings from an independent agency, such as A.M. Best. There are some cheap, non-standard carriers out there who actively resist being rated, so please be cautious – your agent should be able to tell you the rating of a company, and you should be able to look it up online.
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 only three states do not allow insurance scores to be used 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 your 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 insurance scores 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 (such as Lexis-Nexis) or in-house by the insurance carrier. Effective Coverage has spent years working with numerous carriers, and we know which carriers weight the insurance score heavily, and which 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 others.
At Effective Coverage , we understand that bad things can happen to good people, and they usually happen when people can least afford it. The slightest change in credit history could cause a policy to increase. Effective Coverage reviews your insurance score and helps to get you an affordable policy in no time.
We understand that certain credit events can impact your rate negatively, but may not entirely reflect how risky you are (like divorce, for example). We can even work with some carriers to waive the impact that this life event has had on your pricing.
So if your insurance company has increased the price of your policy to drive their profits (or for any other reason) it’s time to take action! You’ll most likely be impacted by a rate increase sooner or later. You can either call around to a dozen insurance companies, or you can just call us at (800)892-4308 or click to get covered - whether you need renters insurance quotes online or coverage anywhere else!
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