By Derek Kartchner | Gila Insurance
If you have looked at your insurance rates recently, you may have seen that they have SKYROCKETED! Arizona has been hit harder than many states and rates have increased on all lines of business by 25-37%, depending on the source. The question is, why? Let’s take a closer look.
Insurance Companies Need Stability
Insurance companies rely on their ability to predict claims. In short, they try to bunch together similar risks that allow them to accurately predict claims across large groups, and that allows them to accurately predict insurance rates. When they do this well, they will make 2-3 cents on every dollar they bring in. Yes, the margins are that thin. They then make money on investments, do that a couple of billion times, and you have piles of cash. Some might say it’s kind of like the plot of Office Space. The key is that they can predict claims, and for that stability of claim costs is key – meaning they know what kind of claims, how often, and how bad they will be. Of course, they can’t rely on things to be stable, so they buy insurance for themselves, which is called reinsurance.
What Happens When Things Go Sideways?
What happens when things aren’t stable, and they can’t accurately predict claims? What happens when catastrophic events pile up year after year? What happens when inflation skyrockets? In a word, madness. Not the good kind that happens in March, just madness. Currently, that’s what we are experiencing. Claims have been higher than expected. Insurance companies are losing 10-15 cents on every dollar they take in. Reinsurance has increased wildly. This is due to wildfires, wind and hailstorms, hurricanes, and more that have occurred over the past decade. While not directly, insurance companies are one of the biggest purchasers of used cars. Used car costs have been up nearly 50% over pre-pandemic prices. The cost to repair cars has increased as well. In addition, insurance companies are also one of the biggest purchasers of construction services. The cost of construction skyrocketed during the pandemic, and while there has been some softening, costs on many things are still elevated. Higher claims and higher reinsurance costs have squeezed insurance companies’ margins, and they are hurting. I am not asking you to cry for them, just telling you what’s up.
What Does This Mean for You?
Unpredictability in claims means 3 things for insurance consumers.
- Increased Rates – Insurance companies are trying to get on top of claims costs, and the simplest way is to increase rates to the end consumer. This is highly regulated by state insurance departments but is a reality – just look at your bill.
- Less Flexibility – In a normal market there are lots of payment options, and insurance companies are willing to take chances on new things. In this current environment, many companies are requiring large down payments or are requiring customers to pay in full. When they are losing money, no one wants to add water to a sinking ship, so they make it more difficult to change or take new risks.
- More Stringent Underwriting – Every insurance company will tell you that they are amazing underwriters, and yet somehow can tighten the screws when they are losing money. Roof age, plumbing type, number of claims, occupancy, and age of home all become disqualifying factors. In short, insurance companies are quicker to say no to everything and everyone.
What to Do?
To be honest, there isn’t much that can be done. This is an insurance market problem, and all carriers are getting hammered. Remember, this has little to do with you individually. Each insurance company has taken a different approach, and some have shut down the options for new business. Others have increased rates slowly and some others all at once. The key is to talk to your insurance agent and find out what they expect from your insurance carrier. If they are a broker, they may or may not have other options available. We are starting to see light at the end of the tunnel, but it may be another year or so before the insurance market truly stabilizes. Until then, make sure to shop early, be understanding, and think about what you are buying from an underwriting perspective. Maybe that 1950s home with galvanized pipes and a 70-year roof should be rehabbed before being rented.