Why Insurance Rates are Increasing

Why Insurance Rates are Increasing

April 20, 2023

If you've noticed that your insurance rates have been creeping up over the past couple of years, you're not alone. Many policyholders have been scratching their heads and wondering why their insurance premiums are on the rise. So, let's dig in and find out what's driving the cost of insurance up!

Why are Insurance Rates Increasing?

First of all, it's important to note that insurance rates are affected by a wide range of factors, including changes in the economy, natural disasters, and shifts in the insurance industry itself. But in general, one of the main reasons why insurance rates have been increasing is because of a rise in claims costs. Claims costs refer to the amount of money that insurance companies have to pay out when customers file claims for things like car accidents, home damage, or medical expenses. And over the past two years, claims costs have been going up for a number of reasons.

Factors Leading to Increased Insurance Rates

One major factor is the increasing frequency and severity of natural disasters, such as hurricanes, wildfires, and floods. According to a report by the National Oceanic and Atmospheric Administration (NOAA), the United States experienced 22 weather and climate disasters in 2020 alone, with a total cost of $95 billion in damages.These disasters not only cause direct damage to homes and businesses, but they can also disrupt supply chains and cause businesses to shut down temporarily. This means that insurance companies have to pay out more claims than they would in a typical year.

Another factor contributing to the rise in claims costs, according to the Kaiser Family Foundation, is the average annual premium for employer-sponsored health insurance which rose 4% in 2020, to $7,470 for single coverage and $21,342 for family coverage. As medical costs continue to rise, so do the costs of insurance claims related to medical expenses.

Finally, there's also the issue of social inflation, which refers to the rising costs of legal claims and lawsuits. According to a report by the insurance company Allianz, social inflation has been increasing in recent years due to factors like increasing litigation funding and changing attitudes toward liability.

All of these factors combine to create a challenging environment for insurance companies, and as a result, many have been forced to raise their rates in order to remain financially stable. According to a report by the insurance rating agency AM Best, the U.S. personal lines insurance industry saw an average rate increase of 6.7% in 2020.

Of course, these statistics don't necessarily mean that every individual's insurance rates will increase by the same amount. Rates will vary depending on a wide range of individual factors, including things like age, location, and driving record.

However, it's important to understand the broader trends that are affecting the insurance industry as a whole, so that you can make informed decisions about your own insurance coverage.