Tuesday Tip: Why do insurance premiums go up when you don’t change anything or add a claim

This is a mystery many business owners and consumers often wonder at renewal time. It’s not the insurance companies getting greedy or just changing it for no reason, there are two very common reasons behind it:

1)      The value of the property you are insuring has increased. Because the replacement cost of buildings and goods goes up every year as a result of inflation, many insurers will apply an automatic increase in the limit insured so that the policyholder will not have to worry about adjusting it themselves. This increase is tied to the CPI index, typically with additional weighting on the construction and consumer goods segments (which are what most impact a claim). Although the rate for the insurance hasn’t changed (the premium per $100 insured), the fact that there are higher limits does lead to higher premiums.

In some types of insurance, such as Auto, you can see the opposite at work. As your vehicle ages, it depreciates and so is worth less. Thus, if you write it off the insurance company won’t have to pay out as much, so you will usually see gradual decreases in the Collision and Comprehensive parts of the Auto premium year over year. Of course, this assumes there are no other things that change, such traffic convictions or at-fault accidents.

2)      Insurance is a method of risk sharing among the policyholders.  Premiums are pooled and losses paid out of the pool.   If other similar policyholders to you are experiencing high claims, then it is more likely that you will also have a claim in the future. A common example is hail claims in the Calgary area. Although not everyone’s house was hit, many have been in the past few years, far above the historical average. This leads most to conclude that we are experiencing a higher rate of hailstorms than in years past (almost $3,000,000,000 in the past five years alone!), so now rates and deductibles have gone up to compensate. It’s only a matter of time before another hail storm hits the area, and the insurers are trying to prepare as best they can for the next one.”

Keep in mind that there are ways to reduce your premiums by modifying your insurance coverage. To learn more about your options, speak with an independent broker.

Blog Author: Kevin Lea | Commercial Account Executive | Rogers Insurance Ltd.