The dreaded rate increase. It seems to happen every renewal regardless of your claim history, but why? If you have been holding up your end of the bargain how could an insurance company possibly raise your rate? You have been paying for insurance your whole life, never made a claim, and now your rate is increasing? What gives? If anything your rate should be going down, right? Not Exactly. There are many factors that play a role in increased rates. We will explore some of them now.
Insurance is a shared risk
I honestly don’t blame you for looking at your insurance policy from a self-centric point of view. It is your bill, your money, and your reputation on the line. The fact of the matter is, whether you like it or not, insurance is a shared risk. This means that companies base their rate increases off of the population, not just you. This fact hits home especially hard when you have never made a claim.
This is the perfect time to remember what insurance actually is, and what it is providing you. Peace of mind. What would you do in the event that you did not have insurance and lost your house in a fire? For the majority of Americans this would be insurmountable. So, we agree that insurance is necessary. Being necessary and reasonable are two different things. Let’s take a look at some numbers based off of average statistics of premiums and claims paid.
According to the National Association of Insurance Commissioners (NAIC) the average premium across the United States in $1,034. The last time this information was calculated was 2012 so we can assume it is probably higher now. Using a modest increase of 2% per year let’s use $1137 as the 2017 figure. Remembering that the main purpose of home insurance is to protect you in the event of a full loss we will compare this to a home’s full replacement value. I want you to think about what your home would cost, not only to rebuild, but also to remove all debris and re-level after a catastrophe. This number should differ from what you purchased it for, or what you would list it on the market for. Home Advisor calculates that the average home as about $150 per square foot to build. So a 2,000 square foot home would cost $300,000 to build on an unmolested plot of land. We will use a 30 year time frame as that is the most common for mortgages. Ok, here is the math:
30 years x $1137 (annual insurance premium) = $34,110.
Assuming you have never made an insurance claim in your life, you will have paid $34,110 for home insurance over a 30 year period. I am not a mathematician but I would rather pay $34,100 spread out over 30 years, than $300,000 all at once. Unless your premium raised to around $10,000 per year, you are making out in this deal.
So to recap, what we are doing here is putting everything into perspective. The fact is insurance companies have to pay out full loss claims regularly, and every year more and more claims are filed. This is the main reasons increases occur.
As a consumer it is important to keep abreast to the increases. Most companies have annual policies. Take 10 to 15 minutes to speak with your insurance company about what is going on with your policy. There are several other contributing factors as to why rates increase.
Every year your policies replacement cost will increase. This is to offset the cost to rebuild a home. Cost of living is always increasing. In turn your additional coverage will increase to keep pace. This costs money. If you wish your home to be covered correctly, this is a necessary increase. The good news here is that it is typically a small increase, in the range of 1% – 2%.
The key factors I want you to pay attention to while reviewing your policies are increases that are disguised in proprietary language. Ask for guidance from your agent when encountering this. If you are experiencing many of these types of rate increases it may be time to find another company. If you get other quotes before you speak with your agent it will be to your benefit. Most agents will try to sell increases as status quo, or out of their hands. You may hear “I don’t control the rates.” While this is true to a certain extent, it does not mean that they can not reduce your premium. If you have a quote from a competitor that is for a lower cost, your agent will not be able to use that logic and dismiss you.
Increases will happen. It is how you handle them really counts.
Review your policy upon renewal every year.
Determine whether or not the increase is standard or irregular.