Insurance Rate Increases—the Perfect Storm

by Regina Wagner

Have you opened your most recent renewal bill from your car and home insurance company only to be met with sticker shock? A rate increase can be frustrating, especially when you have a clean driving record and maybe never even submitted one claim.

The rate increases are not arbitrary, albeit they are annoying. According to Mark Friedlander, a New York City-based nonprofit Insurance Information Institute spokesman, “Some industry leaders have indicated 2022 will be their company’s worst auto underwriting year on record.”  Much has contributed to this perfect storm which has rocked the brand-named insurers, re-insurers, and insurance product consumers feeling the impact of rising prices.

The main culprit behind these steep rate hikes has been the effects of inflation. Lexis Nexis Risk Solutions US Auto Insurance Trends Report cites, “US auto insurance carriers continued to navigate a precarious mixture of increased costs, limited vehicle sales, rising accident severity, and regulatory pushback on proposed rate increases.”  Once an insurance carrier forecasts its needed revenue to cover its pre-tax operating expenses and predicted loss ratios, it will file its rates with the respective state insurance departments. It can take many months to get those rates approved and once implemented, a whole year of rolling them onto their customer bases’ renewal policies before they impact overall profitability. This is one of the reasons why the rate impact was so severe this year for property and casualty policy renewals.

Labor costs are also on the rise. The Bureau of Labor Statistics Employment Cost Index shows that wages and salaries are up 5.1% from March 2022 to March 2023 and 5% from March 2021-2022. Many reading this may sharply rebuke this statistic with a “my wages didn’t go up,” but consider your local auto repair shop or the local contractor being called to repair the water damage from a leaking pipe. Their costs have increased and are being passed to the insurance companies as part of the claim expense. These industries were drastically affected by the shutdown during the coronavirus, the supply chain disruption, workforce shortages, and the increased cost of financing business capital. Many businesses are also trying to make up for all their lost income from 2020-2021. Have you noticed a “supply chain fee” tacked onto a vehicle’s window sticker? This all circles back to the coffers of your insurance companies and their ability to meet these pricier obligations to make their customers whole after a loss.

Natural disasters also contribute to what we’re finding in our insurance renewal envelopes. Swiss Re reported that reinsurance rates are at a 20-year high for January 2023 renewals. Hurricane Ian landed in a densely populated area with high economic values costing the insurance industry an estimated $50-65 billion. Swiss Re Group chief economist Jerome Jean Haegeli states, “Hard market conditions to persist through 2023 due to increasing interest rates which will lead to higher financing costs, and as a result, capacity providers are likely to remain more cautious in the deploying capital for a number of reasons including risk assessment and loss experience”. In layman’s terms, the appetite for insurers to meet the demand for increased catastrophic loss coverage to replace buildings and cars—will shrink. Fewer insurers coupled with higher demand equals higher prices. 

Some things you can do to lower your insurance costs include shopping your rate among various carriers. Insurance companies have different market segments for which they’re priced. One may love to insure your new Tesla/Kia/Honda, while another may shy away from that particular vehicle brand. Take advantage of your carrier’s telematics programs. Most carriers use the data only to provide a discount. While it is true that the overall data may impact insurance rates for a particular demographic or area, ex: rates go up because 21-year-old customers are heavy on the gas pedal, overall, most carriers don’t use the data to raise the rates of the particular customer using their telematics program. Lastly, bundling your auto and home or renters’ insurance often generates a better underwriting cut score making you more attractive to the company to want to retain or earn you as their customer. 

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