“Why do my auto insurance rates keep going up?”

One of the most common questions that an insurance agent receives from a customer is the question “Why do my auto insurance rates keep going up?” This can be a very difficult question to answer as most agents aren’t able to access the specific rating deals that an insurance company charges. This article will address some generalities that can help explain why rates increase every year.  

When an insurance company produces a rate on a vehicle, they are looking at a number of factors that can affect the rate that they will charge. There are really two factors that go into producing a rate that the insurance company charges.  

1. The insurance company’s cost of doing business.  
2. Your personal data. 

 Let’s break it down. 

The Insurance Company  

Business Expenses

An insurance company is a business that has ongoing business expenses just like any other business. They have to pay employees’ salaries, group benefits, property taxes, office expenses, rent, and other normal expenses to run a business.  They also pay claims as well as set aside funding for reserves, which are claims that have yet to be paid but are already known.   

Employees

Employees in the insurance industry are similar to employees in any industry. Typically, employees will receive raises on an annual basis and the insurance company is also going to incur additional expenses when costs increase such as group benefits and payroll taxes. Insurance companies will pay for these costs in one of two ways. These costs will either be paid from new business growth or pricing increases.  

Policyholders

Insurance companies also pay for claims incurred by their policyholders. A typical claim might consist of property damage to vehicles or buildings, medical costs, and attorneys. In 2020 we have seen a shortage of auto parts and the cost to purchase those parts and repair a vehicle has increased.  As third-party vendors, such as body shops, pay their employees more, the body shop’s costs increase which are passed along to the insurance company who passes those costs on to you.  In addition, when a person is injured the cost of medical care increased over the last few decades.  Large settlements continue to increase annually as litigation gets more costly.  All these costs are ultimately spread over the policyholders of the insurance company.  As their costs increase, the costs of insurance increases. 

Offsetting the Costs

So, what does an insurance company do to offset those costs?  Well, they invest that money in real estate, securities, financial markets, etc to obtain an investment return that can be used to offset the increased costs mentioned above.  In years where the return on investment exceeds the costs increases, rates go down.  In years where costs exceed the investment return, then premiums go up.  Usually, these increases are minor and are usually within 1-2%.  In many states, the cost of workers’ compensation premium has decreased over the past 8 years, while the cost of business auto claims has increased.  

In the past few years, we have seen historical damage nationwide as well as litigated claims settled for new highs.  Reinsurance Carriers are increasing rates higher than normal and these are being passed along.  In addition, carriers are less willing to take on riskier accounts right now or accounts with a poor loss history.   

Your Personal Data 

The personal data of every single person on the policy will affect and modify the base premium being charged by the insurance company. Most commonly these are your credit score, type of vehicle you drive, zip code where you live, how far you drive to work, your driving record, age, marital status, and homeownership.   

Credit Score

Industry studies have shown that the higher the credit score of an individual the less likely they are to have claims, and when they do have a claim the less costly it will be. Insurance companies well check a credit score at the policy renewal and there is a potential that if the credit score has gone up or down, the rate will also change.  

Type of Vehicle

The type of vehicle that you drive will also affect the individual insurance premium. Even though vehicles might be similar, there are variations between the base model and the high-end model that will cause differences in rates based upon repair costs. In addition, larger SUVs tend to cause more damage than smaller vehicles, therefore those larger vehicles will have a higher liability rate.  

Where you live

It’s not uncommon for someone in the city to pay much more for auto insurance than somebody in a rural area. The person in the city may be driving in rush hour traffic and when they have an accident it can immediately impact multiple vehicles whereas in rural areas accidents might be less common and involve less. 

How far you drive

Insurance companies will charge different rates depending upon how far you drive to work. Do you commute 20 or 30 miles more each way or do you work from home?  Insurance companies will assume the more you drive the higher the potential risk for an accident.  

Driving Record

Insurance companies will also increase rates when drivers on a policy have accidents or tickets.  A person who has multiple claims is much riskier than a person who has a clean driving record and no tickets.   

Age/Marital Status/Home Ownership

These are factors that ultimately an insurance company will use to factor in responsibility. Typically, as people get older and settle down they will tend to be safer in their driving habits as well as their overall lifestyle.  

So what does this mean for you? 

We hope this helps explain why rates change every single year. There are a lot of moving pieces and a lot of factors that can affect how an individual’s rate is produced. When you factor in the insurance companies’ exposure and personal data changes, many times these calculations happen via computer and as an agent, we are privy to the behind the scenes rating details.  

Our best recommendation is to determine personally what your strategy is going to be when reviewing your insurance expense. There are some carriers out there that offer diminishing deductibles meaning that the longer that you stay with them, the lower your cost will be when you have a claim. There are also times it may be in your best interests to switch carriers for better pricing and better coverage. The world would have you believe that it’s fairly easy to do this online and that all policies come in the form of basic, good, and better.

At Thams Agency we’ve been providing auto insurance services since 1934. There are numerous factors that go into making sure that you’re properly protected and when you have the worst day, that your insurance policy is going to be there to protect and indemnify you. If you have any questions, our team is here to help! Please call us at (712) 263-3193 or email us at team@thamsagency.com.