Are You Insurancing Wrong?
By Derek Kartchner | Gila Insurance
A frequent complaint we hear is that insurance rates increase year after year. We understand this frustration, as we are also insurance consumers. This frustration often stems from two misconceptions: first, that insurance companies should not adjust rates to account for increased risk, and second, that insurance is a "set-it-and-forget-it" product. While we might wish these statements were true, neither is. Let’s explore why.
Risk is Increasing, and Rates are Soaring
Ultimately, insurance companies are profit-driven businesses. As risks rise, insurance rates will rise, too. At a minimum, insurance rates increase to keep pace with inflation. However, the surge in insurance rates is driven by more than just inflation; it’s a result of economic, technological, and environmental factors.
Inflation and Rising Costs: Inflation drives up the cost of materials and labor, making it more expensive for insurance companies to cover claims for repairs or rebuilding. Rising home values also mean higher costs to replace properties, pushing premiums upward.
Technological Advancements: Modern cars feature cameras, sensors, and other safety enhancements, but these make vehicles costlier to repair. Today, a fender bender might require removing, replacing, and painting a bumper, costing at least $3,000, while an old chrome bumper might need only some wax.
Natural Disasters: The increased frequency and severity of events like hurricanes, wildfires, and floods have led to larger payouts from insurers. These costs are distributed among policyholders through higher premiums.
Reinsurance Costs: Reinsurance—insurance purchased by insurance companies to protect against large losses (like the recent California fires or Tornadoes in the Midwest)—also contributes. When reinsurers face higher risks or claims, they raise their rates, which insurers pass on to consumers as higher premiums.
This may feel like dense reading, but the notion that "I haven’t had a claim, so my rates shouldn’t increase" oversimplifies the issue. By definition, insurance involves transferring and sharing risk. When insurance companies incur losses, it affects all policyholders. It’s worth noting that insurance companies are heavily regulated, and every rate increase must be approved by a regulator after the company demonstrates a need and justification (it's a bit more complex, but it's the basic idea).
Insurance is Not a "Set it and Forget it" Situation
As someone who shops for insurance professionally, I understand the frustration. However, insurance policies should be reviewed at least annually and shopped every three years. If you work with an independent agent, like Gila Insurance Group LLC, this review process is often included. Still, many policies come with default coverage options that may not fully meet your needs.
Here are some key questions to consider during your review:
Should I increase my liability protection? Evaluate your current coverage, the structure of your real estate business, and any recent changes. For example, if you added rental properties last year, your assets—and thus your liability exposure—have increased.
Does my policy adequately cover my property? If you received a claim payout based on your current coverage, would it be enough to rebuild or repair your property?
Have I raised my rents? If so, by how much? Does your current coverage reflect this increase in rental income?
Have I changed my rental model? For instance, if you switched from long-term tenants to a vacant property or short-term rentals, your insurance needs may have shifted.
Reviewing your insurance policy takes just a few minutes, but it is crucial for protecting your business. For assistance, reach out to the experts at Gila Insurance Group, LLC. We can help you assess your insurance and risk management needs.