–‘Why did my insurance premium go up?’ This is a question that we address almost every day. No matter what kind of policy you’re dealing with– auto, homeowners,etc– the last thing you want to see on your insurance renewal form is a premium that’s been increased for no apparent reason.
That’s exactly what we’re here to clear up. Today, we’re going to discuss the four most common reasons that insurance companies might increase your premium. And as a bonus, we’ll mention a fifth reason that most companies just don’t like to talk about.
Nobody likes this kind of surprise, but insurance goes up all the time and people naturally get confused whenever it does. Read on to dig into why it happens.
1. Rate Changes
One of the most common reasons your premium goes up is because of a rate change. But while this might seem fairly straightforward, you still deserve to know what actually factors into these rate changes.
The key is understanding the insurance renewal process. Obviously, a renewal marks the end of one policy term and the start of another. It’s also when you’ll receive a new set of insurance documents. Many people just glance over these documents and click ‘I Agree’ — the digital age version of ‘signing on the dotted line’– but this isn’t really the best idea.
You see, these documents spell out important agreements between you and your insurer. They also contain the price of your renewed policy. You’ll need to pay close attention to both of these components to understand why your company has raised your premium.
Oh yeah, there’s one more important thing to know about renewals– each one of them gives your company an opportunity to increase your rates. That’s why you should opt for a yearly policy instead of the 6 month versions they often promote. That way, your company will have fewer opportunities to increase your premium.
Rate Changes and Increased Insurance Premiums
Let’s take your homeowner’s policy, for example. Maybe it was $786 for last year, but now they’re asking you to pay $846 for what seems like the exact same policy. If you’re like most people, you’ll be asking yourself ‘What’s going on here? I didn’t have any claims last year and nothing else has changed either, but my premium still went up by almost 10%.’
This confusion is very natural. So is the frustration that so often accompanies it. To combat both of these unpleasant feelings, here’s a look at how rate changes typically play out. First, companies have the right to change your premiums at the time of each renewal. While insurance companies do have to file their rates with their state regulatory agency, increases don’t have to be because of any particular reason.
There are several different reasons your insurer might increase your rate. One is the amount of claims they’ve had to pay out. And these don’t have to be claims they’ve paid for you either. An insurance company might increase premiums because of claims they’ve paid out to clients in your demographic, region, or to their entire customer base.
This leads to another common reason for rate changes– general profitability. Strangely enough, insurance companies like to make money. So they might raise your premiums just to increase revenues. Nobody likes to hear that, but it’s just part of how the business operates.
Additionally, a company may not wish to expand in your particular state, county, city, or region. If insuring people in the area where you live exposes your company to excessive risk, there’s no better deterrent to new customers than higher rates.
2. Loss of Discounts
Discounts are everything when it comes to determining your insurance premium. There’s a good chance you and your agent discussed the applicable discounts when you first purchased your policy, but it’s easy to lose track of them after that. But whether you’re up to date on your policy’s discounts or not, losing any of them will certainly increase your premium.
We have another video that talks about the most common insurance discounts, but here is a list of the 8 most common you’re likely to encounter:
- Safe Driving Discounts
- Association or Job Discounts
- Age & Gender
- Paid in Full
- Loyalty & Intro
- Good Grade Discounts
So while it’s a great thing indeed to get one or more of these discounts, your rates are can go up significantly if you no longer meet the qualifying conditions.
3. Coverage Changes
Insurance companies can change their coverage options at the time of renewal. This doesn’t happen often, but it can very confusing and/or hidden in the renewal documents you receive. Some of the most common coverage changes occur in the realm of auto insurance. Here are a few coverage changes to watch out for when renewing your auto insurance:
- Increased deductibles
- Lower liability limits
- Removal of roadside assistance (usually if you’ve had to use this a lot in the recent past)
Homeowner’s Coverage Changes
Changes in your homeowner’s coverage can also occur at the time of renewal. One of the biggest changes that insurance companies make without the permission of clients has to do with deductibles. They might send you a renewal form that says our minimum deductible is now 1% of your total coverage, for example. This can be a significant change from your previous policy, so pay close attention to these figures. Otherwise, you might have to pay a lot more if you have to make a claim.
You don’t usually see changes in homeowner’s liability limits, but it’s a fairly common practice for a company to increase the replacement cost of your home. This isn’t a really a bad thing– an increased replacement cost can be to your benefit– but we have other videos that cover this subject in some detail.
4. How Claims Can Lead to Increased Insurance Rates
Clearly, the reason you have insurance in the first place is the possibility of being forced to make a claim. However, if you do make a claim during a given coverage period and the insurance company had to pay out to cover it, you might see an increase in your rate at the time of your next renewal. And while this is understandably frustrating, it’s just how the insurance business functions.
It’s important to understand that different claims have different effects on your rates. It all depends on your particular company. Some don’t raise your premium for claims that weren’t your fault– lightning, hail damage, etc. But if your claim could have been avoided, your rate is likely to increase. While this is how most companies tend to operate, there isn’t a hard and fast rule. Every company handles different types of claims differently, so be sure to ask your agent how a given claim is going to affect your premium.
A very common ‘rookie’ mistake is filing small claims with your insurance company. It’s not worth it to make a $100-$200 claim because you’ll often pay much more than that with increased premiums over the long term. In these cases, it’s usually better to suck it up and pay for the damages yourself.
5. Bonus Reason: Increased Insurance Rates and Your Credit Score
Here’s a reason for increased insurance rates that companies don’t mention very often– your credit score is used to calculate your insurance premium. Your insurance company doesn’t have many ways to know you, so your credit score is one of the only ways they have to assess how well you manage your finances. This is an unfortunate (and frustrating) situation, because if they knew you, they might understand that your credit score DOESN’T actually reflect who you are. But in the end, that’s what they’re looking for– a reflection of who you are financially– and insurers just don’t have access to much else.
While illegal in California, this is standard operating procedure in most states. No matter how understandably frustrating this practice is, a reduced credit score can (and will) lead to increased insurance rates. Sometimes, your renewal times comes around and you’ll see a rate increase that has nothing to do with the four reasons we just talked about. This is because your credit score has changed. This is frustrating for everyone involved– including your insurance agent– but all you can really do is be aware of it.
So these are the four (plus one) most common reasons that your insurance rates went up. Hopefully, this information will help you understand your renewal process better, as well as answer the question ‘Why did my insurance premium suddenly go up?’
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