why is my insurance so expensive this year?
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If you’re like most people, your insurance has recently gone up with no explanation. Although we can list factors that might play a part in these increases, the reason your insurance is going up is a combination of all of these factors.
D&O, EPLI, Property, General Liability, and Umbrella policies are all going up 15% to 30% year over year.
Below are some factors causing increased insurance costs:
Factors Causing Increased Insurance
- Increased Risk Factors. The rezoning of certain open areas as high-risk fire zones has increased carriers’ perception of risk and therefore, is driving up prices.
- Re-insurance. Insurance carriers purchase insurance similar to a policyholder. However, due to consistent years of catastrophic losses, the availability has been restricted and costs to insurers has increased.
- Labor Shortages. Changes in immigration law, in combination with stricter criteria for classifying 1099 vs. W-2 workers, have added to the labor shortage post-pandemic markets are experiencing.
- Supply Chain Disruption. Shipping routes are overrun, ports are backlogged, shipping containers are in short supply, and trains are delayed causing domino-like effects to businesses. With increases in cost and time to deliver goods comes an increased risk of in-transit losses and loss of business market share.
- The Pandemic. With all of the increased insurance claims from COVID-related closures, insurance companies have paid out millions in unanticipatable claims.
- Inflation. Property values are soaring and insurance premiums are along for the ride. Insurers have become picky about whom they will insure, causing an increase in policy movement from broker to broker and carrier to carrier.
- Increase Cyber Threats. Office-level security firewalls are not present with people working from home. This, in combination with the widespread usage of online payment options in more businesses, has raised the cost of cyber liability coverage.
These seven cost increases are complicated, global, and not going anywhere. Want to know what you can do to get your costs down?
Next, we wanted to take this opportunity to provide insight into the ever-changing landscape in the insurance sector. You may have noticed strange behavior from insurers, whether you purchase coverage for your home, business, or both.
Below are the forces exerting themselves on the insurance industry today, which have caused the insurance companies to push rates as well as exit certain geographic areas. We hope this information will provide clarity as well as recommendations on how to take control of insurance costs during this time.
Low Bond Rates
It is interesting to know that in a normal economic market, insurance companies use insurance premiums as a loss leader. The premium loss ratio (total annual Gross Written Premiums valued against total Incurred Losses) typically runs from 105% to 108%.
This means that for every dollar collected, the insurance company expects to pay out over a dollar in claims. The insurance companies offset this loss, however, with much higher returns in their investment income. A significant source of safe return has always resided in the bond market.
Since today’s bond market has much lower than normal yields, with no relief in sight, insurance companies are seeing lower than normal investment returns.
For lack of a better word, we give you “un-model-able losses.”
Insurance companies rely on accurate actuarial “modeling“ to predict losses and help set proper rates based on predictable loss scenarios. For the last ten years, however, the global insurance industry (including the re-insurance segment, but more on that later) has been hit with a regular stream of wildfires, earthquakes, mudslides, hurricanes, abnormal freezes to name just a few.
These are classified in insurance-speak as “un-model-able losses.” Actuarial models have not yet been perfected to incorporate these types of losses. When the industry is faced with these events, profitability plummets, and insurance carriers are challenged to find rates that can accommodate the un-model-able.
Reduced Reinsurance Capacity and Increased Cost
Insurance companies “lay off” much of the value of their loss exposure on the “secondary” or reinsurance market. This considered, the reinsurance market is much more sensitive to how losses will affect their rates, as global reinsurers are the backstop for the industry.
As you may expect, reinsurance rates have spiked steadily over the past five to seven years due to consistent catastrophic losses. In some cases, actual insurance writing capacity is depleted to the point that coverage is no longer available in certain industry segments.
The reinsurer’s response to claim severity and frequency is to restrict the availability of coverage and raise the rates to your insurance company. Year over year, insurance carriers have been paying significantly higher rates for the cost of insurance and that cost is passed to the policyholders.
Remapping of “Fire Zones”
To a carrier, all insurance companies have become keenly aware of what they now consider fire zones, as well as the concentration of insured value that resides within these zones.
Both commercial and residential insures have undergone varying degrees of re-evaluating what they now consider to be locations residing in, or adjacent to, a newly established fire zone. You may have had friends, or even neighbors, complain of non-renewal notices they received from their current insurer.
Again, to a carrier, underwriters refuse to discuss any type of exception we may want to make regarding their “fire-zone” evaluation. Each carrier has determined, through their re-insurance treaty with their re-insurance carrier, what they are allowed or not allowed to write.
They will not make exceptions for any policyholder, which means remapping for fire zones has forced many policyholders back into the market due to the non-renewal of many policies. This is a market with a limited supply.
Why Should This Matter to Me?
The simple answer is to remember that insurance companies are for-profit enterprises. Because of the fiduciary responsibility to its policyholders, insurance companies must stay vigilant on profitability.
As we discussed above, the industry typically operates at a premium loss ratio of over 100%. With the forces pressing down on the industry discussed above, carriers have now focused their efforts on becoming profitable on written premium.
So, how much do rates have to rise to take a carrier from a 5% to 10% loss on each dollar collected to a profit of 10% or 15%? Rates have to rise 10% to 20% on average (this contemplates loss-minimal and loss-free accounts) in order for the carrier to be profitable on collected premiums.
Policies with anything approaching, or exceeding a 50% loss ratio for the last three years combined can see premium increases from 50% to 125%.
What Power Do I Have to Control My Premiums?
Believe it or not, policyholders have the ability to take control over policy costs. The insurance underwriters key in on two areas: property age and maintenance/upkeep. Any property approaching 20 to 25 years old or older will require the underwriter to dig into how well the property has been maintained.
They will want to know about tenants (for commercial properties) and updates, or placement, of the following building systems (home or business). For example, electrical, plumbing, HVAC, and roof systems.
If the age of your property is older, many underwriters are simply choosing not to provide quotes for buildings that have not had these systems updated in the past 10 to 15 years. Please create a budget to update these older systems. It will pay dividends for many years to come in the lowest premiums obtainable in the marketplace.
A Final Word
The most impactful measure used by underwriters to measure account quality is historical losses. Underwriters typically look back three to five years depending on the account.
Homeowners’ losses, both home, and auto, are aggregated to a central database used by all insurers. Commercial accounts, however, are not tracked to a central database.
Losses that cause the most heartburn to an underwriter are water losses. Water perplexes the savviest of insurance actuaries. Policies with consistent water damage claims over time are prime for carrier non-renewal. The lowest hanging fruit for property owners is the proactive replacement of all interior plumbing fixtures. Angle stops, water hoses, and toilet fixtures (float and flap) are the most guilty of causing expensive water damage claims. Next up, would be sewer and drain backups. Please snake all drain lines on a regular basis. Simple, cheap, and effective.
As you’d anticipate, older properties require more information as underwriters evaluate the quality of electrical, plumbing, heating/cooling, and roof systems.
Remember the insurance policy is not designed to be a “warranty” against less than regular maintenance and upkeep. Property owners can go a long way in stabilizing insurance costs over time by creating and implementing pro-active regular maintenance protocols. If you can create an efficient program, you are doing all you can do to protect your insurance costs for the future.