The insurance industry is one that is constantly evolving, with rates fluctuating based on a variety of factors. In recent times, we have seen industry-wide insurance rate increases that have left many customers wondering why their premiums have gone up. While there are several reasons for this phenomenon, taking a deeper look at the why can help you better understand the increases in your policy.
Increased Claims
One of the primary reasons behind the rise in insurance rates is the increase in claims made by policyholders. According to data from the Insurance Information Institute (III), natural disasters caused a record $95 billion in insured losses in 2020 alone. This is up from $54 billion in 2019 and well above the previous record of $67 billion set in 2017.
As insurance companies pay out claims, they must raise rates to offset the costs of these payouts. The III reports that in 2020, the US property/casualty insurance industry's net income after taxes fell to $33.6 billion, down from $60 billion in 2019. Insurance companies are required by law to maintain a certain level of financial stability, and they do this by ensuring they have enough reserves to pay out claims. When there is a surge in claims, insurance companies need to replenish their reserves, and one way to do this is to raise premiums.
Increased Reinsurance Costs
Reinsurance is the process of insurance companies purchasing insurance for themselves. Essentially, it is insurance for insurance companies. Reinsurance companies provide coverage to insurers in exchange for a premium. This helps insurers manage their risk and ensures that they can pay out claims even in the event of catastrophic losses.
In recent years, there has been an increase in the cost of reinsurance. According to data from the reinsurance company Swiss Re, global insured losses from natural catastrophes and man-made disasters were $83 billion in 2020, up from $54 billion in 2019. Reinsurance companies are also facing increased costs due to low-interest rates. According to data from the Federal Reserve, the federal funds rate has been near zero since March 2020. This means that reinsurance companies are not earning as much on their investments, which puts pressure on their profitability. As a result, reinsurance companies are passing these costs on to insurers, who are then passing them on to policyholders in the form of higher premiums.
Increased Costs of Doing Business
Insurance companies have to bear the costs of running their business, such as marketing, staffing, technology, and infrastructure. In recent years, the cost of doing business has gone up, leading to increased insurance rates. According to data from the Bureau of Labor Statistics, the producer price index for insurance carriers increased by 5.5% from January 2020 to January 2021. This is well above the 2.2% increase in the consumer price index over the same period.
Furthermore, the COVID-19 pandemic has had a significant impact on the insurance industry. Insurance companies have had to spend more on resources such as cleaning and disinfecting offices, providing employees with personal protective equipment, and transitioning to remote work. According to data from McKinsey & Company, the US property/casualty insurance industry's expenses increased by 4.4% in 2020 due to COVID-19 related costs.
In conclusion, there are several reasons for the industry-wide insurance rate increases that have been observed in recent times. These include increased claims due to natural disasters and other catastrophic events, increased reinsurance costs, and increased costs of doing business. While these increases can be frustrating for customers, it is important to understand the underlying reasons for them. By doing so, policyholders can make informed decisions about their insurance needs and take steps to mitigate their risk. Caerus Insurance also plays a critical role in helping customers navigate these challenges, by providing clear and transparent information about their policies and working to keep costs as low as possible while maintaining the financial stability needed to pay out claims.