The conception of insurance is the spreading of risks for a few individuals, among many. This is done when individuals and businesses pay a premium to an insurance company to cover them in case of a catastrophic occurrence. In other words, we all pay premiums in case something happens to one of us.
Believe it or not, this simple concept is what drives the existence of all insurance companies. As much as we all complain about insurance, we all have it. If something happens, we can’t afford to be without it. The attached article from “Business Insurance” magazine, an insurance industry publication outlines some ideas that make me think our insurance rates are going to go a lot higher before they come down at all.
In order for me to make my case, I think it’s necessary to review a basic concept of insurance that is referred to in this article. The very concept that I’m referring to is called an underwriting profit. The insurance industry would have us believe that underwriting and rating insurance policies is a complicated procedure. However, when you break it down to its simplest form, insurance is just like any other business. Profits are what’s left when you subtract expenses (dollars out) from revenues (dollars in). In insurance terms, this means a combined expense ratio far enough below 100 % to allow for an acceptable profit. In other words, how much is it going to cost to underwrite, issue, and service a policy and how much does the insurance company expect to pay in claims? If there is money left, that’s an underwriting profit. If the expenses and losses are higher than the premium collected, that’s an underwriting loss.
If the insurance industry accepts the concept laid out in the article by the chairman of Lloyd’s of London, Peter Levene, my opinion is not only are insurance rates going to rise but all kinds of coverage is going to be harder to get. If the insurance companies can no longer count on high incomes from their investments, their profits have to come from another source. Us, the customers. While this may not seem entirely fair, I’m sure very few people complained when rates were low. The disturbing point Lord Levene eludes to is that he advocates pursuing an underwriting profit even when investment returns are high. This is disturbing because in the past as the investment markets changed and higher returns were being earned. The insurance customer shared in these returns in the form of lower premiums and easier underwriting. For example, the premium for a particular business when investments are bad might be $10,000. In the past, when investments were good, that same business might have paid only $6,000 for their coverage. Assuming Lord Levene’s position is accepted, that $10,000 premium would remain constant regardless of how much the insurance company was making on their investments and would only rise if the markets turned even worse. To make things even more difficult, if this business had suffered any claims, they are at greater risk of having their coverage cancelled. At that point, this company would be forced to find a new insurance carrier. This is where things could begin to spiral out of control. Assuming the new insurance carrier is also looking for an underwriting profit, they would be forced to add the cost of what they consider to be a higher risk of claims to their expenses and this $10,000 policy might now cost $15,000. The customer now has a decision to make. Accept the higher premium and absorb the cost or pass this cost to their own customers in the form of a price increase.
At this point you may be wondering how all of this relates to why “my rates are so high.” My thinking is simply this. If the business insurers subscribe to Lord Levene’s theories, then the personal insurers will probably not be very far behind. I have the unique perspective of a father with twenty-three years experience in the insurance industry, which gives me some insight as to “why my rates are so high.” I pay around $3,000 a year for my car insurance. According to my father, the reason is that the insurance companies feel that due to my age and lack of driving experience, I am more likely to have an accident. This likelihood comes back to me in the form of higher rates. While I may never have that accident, other members of my age group have in the past been in more accidents than any other age group.
Statistically, that makes me a less desirable risk than someone in another group. For example, my parents pay less than the $3,000 I pay to insure both their cars. Another factor is geography. Where you live has as much to do with your rates as what group you belong to and what your claims history is. While my $3,000 premium seems ridiculously high, the premium for the same coverage might be as much as $4,000 just ten miles west of where I live. Move me to Brooklyn and that rate would be more than $7,000. This seems extremely unfair to me. Why should where I live have any bearing on my rates?
The answer apparently has to do with the same logic that makes younger drivers pay more than more experienced drivers. It seems that insurance companies not only group drivers by age but by other factors, such as population density (how many more cars are there in a given geographical area?), claim frequency (how many more claims are there in Brooklyn vs. Eastern Suffolk County?). The companies also take in to account moving violations. Statistically speaking again, a driver with multiple traffic violations is an accident waiting to happen. Add to that, the logic that someone who makes a habit of passing stop signs or red lights is individually increasing the probability that they will be involved in some type of loss. People who drive fast not only have the increased probability of loss but also because of the speed, increase the probability of a more severe loss. Thereby costing the insurance company, and all of us, that much more money. This is why insurance companies either refuse insurance or at the very least charge much more for drivers with violations on their records.
While all of this barely scratches the surface of what insurance companies look at when determining their rates, it does give us a pretty good idea of what we can do to keep our rates as low as possible. One thing would be to live in an area with less people and lower crime rates. For most of us, this is impossible. So what can we do without moving so far into the country that our nearest neighbors live five miles away? For one thing, avoid accidents and don’t pile up the moving violations.
All I can say is that as unfair as insurance seems, ultimately the blame for higher rates rests with all of us. If no one ever had an accident, all we would have to insure against would be fire and theft. Since no one ever having an accident is not realistic, we can thank the powers that be for greed. If the insurance companies can find a way to make more money, you can bet they will do it. So while Lord Levene’s theories are disturbing, we can count on the overriding greed of the insurance companies to offset the theory of always making an underwriting profit. What I am trying to say is that when the investment markets are good, insurance companies make more money. As long as they can make more money by writing more policies at lower rates then by looking for that pie in the sky underwriting profit, that’s exactly what they will do. You can always tell when an insurance company is doing well in the market. Rate increases are few and far between and the company is writing more policies. When the market turns bad as it is now, insurance companies raise rates and reduce the number of new policies they sell.
When you consider all of the factors that go into what an insurance company charges, combined with all the different laws and regulations they are required to comply with from state to state, it’s understandable why rates are what they are at any given time. So I guess the answer to my question is not as easy as my first thought. Between investment markets, geography, age group, driving experience, prior loss history, and driving record, it’s a wonder how they come with any rates that we can afford and still stay in business.
I am not sure if I agree or disagree with the logic and statistics used by the insurance companies but I am sure of one thing. My rates are too high!
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