ProSpeak

Why are Insurance Premiums Going Up?
Apr 1, 2024
Trey Gregory, AIC, AINS, CPCU
ProSpeak

In 2023, the average cost to insure a vehicle in the United States increased to $2,019, up 24% from $1,633 in 2022 and 29% from $1,567 in 2021. The simple answer is inflation, but it’s important to understand the impact inflation has on the insurance industry. 

One of the most important metrics of an insurance company’s financial condition is its “combined ratio.” The combined ratio is a formula that divides earned premiums from claims and administrative expenses. So, if an insurance company’s combined ratio is 100%, that means for every dollar brought in, one dollar is spent on claim or administrative expenses.

Carriers will invest earned premium into markets and other securities to increase income. Even if a carrier is operating at a 105% combined ratio (operating at a 5% deficit), it may still turn a profit if investment income makes up the 5% difference. 

What has completely turned the industry upside down is the rapid inflation that started in 2020. Used vehicle parts and building materials are over 33% higher than they were just four years ago. When the cost of materials goes up, so does the cost of insurance claims. If claim expenses increase, but premiums remain the same, the combined ratio will increase, threatening insolvency. These increases necessitate rate changes. The good news? 2023-2024 is likely the biggest one year jump in premiums we will see for a long time, and experts believe the market will stabilize come 2025. 

As for the subject question, I am sure many of you are thinking, “That’s an acceptable explanation, but I haven’t had a claim, so why is my premium going up?” It’s important to remember the purpose of insurance on its most basic level — pooling everyone’s resources to assist or indemnify those who suffer an accidental loss. You are being charged what the carrier believes your contribution would be to the pool should you need to use your policy. 

Source: Insurify

Gregory Associates, Inc.

Phone: (260) 432-3695

Email: trey@gregoryinsurance.net

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