The Rising Cost of Insurance
One of the most frequent questions we get at our firm is “why did my rates go up?” That statement is usually followed up with “I have never filed a claim”. Both statements are great questions, and both are very relevant to the recent rise in the cost of insurance. While it would be virtually impossible to explain every single reason as to why insurance rates increase, listed below are some of the biggest factors that affect our premiums. In addition, these factors are not just factors that affect our premiums here in Florida but are factors that affect the premiums of policyholders throughout the United States. I recently spoke to an agent in IOWA who said they were also dealing with carriers going bankrupt as well. While the premium swings have always been more dramatic here in Florida, currently, they seem to be affecting everyone across the country.
But before we do a deep dive into the cost of insurance, let me digress for a minute and explain the fundamental premise behind insurance. The premises behind insurance goes back to the 1700’s whereby several people “pool” their monies together, and then if one of them has a claim, they can reach in to the “pool” and take the money out to pay that claim. If monies were not “pooled” together to pay claims, and a person bought insurance one day, and then had a complete loss that night, they would not have enough money to pay their claim. Another premise behind insurance is that insurance companies have to comply with Statutory Reserve requirements as outlined by The McCarran – Ferguson Act of 1945. This basically means that the insurance companies must keep enough money on hand to pay claims and stay liquid. Again, this is a very important point to understand, as each states’ regulator must test the insurance company’s liquidity, in an effort to make sure that the insurance carrier will be financially strong enough when the insured needs them the most.
FIRST – Legal Issues – Something that has been a recent phenomenon here in Florida over the last 10 years has been the number of lawsuits and the advertisements of those lawsuits. While I am not going to get in to whether those lawsuits are legitimate or not, what is important is to know that we all pay for those verdicts, through our increased premiums. When you see a Billboard stating that a particular Attorney got me $1,000,000 in a settlement, it’s important to understand that we as consumers are paying for that. When someone gets a new roof on their home due to “hail damage”, we as fellow insureds paid for that roof through increased premiums. Therefore, the more advertisements that you see with regard to excess verdicts, the more likely we will see increased premiums. Legal issues are one of the premium factors that has far reaching tentacles affecting multiple things. For instance, the state will often protect the consumer, but they don’t protect the agent or the agency. What I mean by that is, the state will tell the insurance company that they can’t non-renew customers due to excessive claims, but they don’t tell the insurance company that they can’t terminate an agent for excessive claims. So, an easy way to get away from excessive claims is for a carrier to non-renew the agent’s contract. This now means that the agent loses a portion of their livelihood and may have to let staff go-especially if that particular carrier made up a large portion of their income. Again, something that we didn’t see happening 10 years ago.
SECOND – Re-insurance rates – The vast majority of consumers do not realize that insurance companies buy insurance from other bigger insurance companies. This concept is known as re-insurance. Typically, the larger the insurance company the more re-insurance carriers they will use to cover their exposure. Many times, these re-insurance companies are global companies that invest all over the world. This means that if a carrier that provides re-insurance to a home insurance carrier here in Florida, has been paying out claims in another part of the world, it can have an effect on the re-insurance rates that they charge to the home insurance carrier here in Florida. This also works in reverse. If an insurance company has suffered two hurricane claims in the same year, ex)……. 2022, that can affect the re-insurance rates that a re-insurance company charges home insurance carriers in Florida. This is a very important concept to understand when you consider political unrest in places like Oregon, hurricanes in Florida, the recent fires in Maui and the floods in California. All of these events affect the rates that we pay for insurance products.
THIRD – Claims frequency/increased claims – Claims frequency is one of those items that can affect premiums both individually and collectively. If a carrier is starting to see a TREND within a certain group/classification, they may or may not decide to continue insuring that individual, group or classification. There are often “trends” that start developing within a group such as sinkhole claims, water damage claims, delivery claims, hail damage or workers compensation claims. Statistically speaking, someone who has filed an insurance claim is 50% more likely to file another claim. Carriers spend a massive amount of time and resources researching the patterns and trends of claims in order to determine premiums and insurability. Another significant aspect in the claim category is increased claims in general. This is partially due to the fact that disaster prone areas are becoming more populous as new residents move in. Data found in a Redfin study shows increased migration to disaster prone areas like Pasco, Hillsborough, Brevard, Lee, Sarasota and Charlotte counties which have high rates of flood, heat and storm risks. Again, increases in claims means that carriers must increase premiums to manage loss ratios.
FOURTH – Fraud – While we would all like to think that everyone was up front and honest, it’s just not the case. You could also make the argument that our moral compass as a society is not what it used to be. Long gone are the days of “leaving the back door unlocked” or using a handshake as an agreement. Fraud plagues the insurance industry in many forms. A common request when someone is shopping for insurance is to ask for what is cheapest. One form of fraud is to purchase “cheap” insurance by leaving out important information that would cause the premium to be more expensive. It is of utmost importance that the policy coverage is correct, not necessarily what is cheapest. You don’t want to go to file a claim, only to find out that it’s not covered because you intentionally went with the cheapest option, knowing that it wasn’t done properly. Staged auto accidents, past sinkhole claims, Assignment of Benefits claims related to hail, water damage, windshields, plumbing pipes, restoration, etc. and workers comp claims have all been wrought with fraud. The main purpose of insurance is to make the named insured financially whole after a peril, not to use insurance as a maintenance program or for financial gain. I recently read, that in the United States, there is more “soft” fraud surrounding insurance than any other business except taxes. In an excerpt from the Insurance Journal, the rise in litigation in Florida has been staggering. The article states, “According to National Association of Insurance Commissioners (NAIC) data mined by the Florida Office of Insurance Regulation, while Florida homeowners insurance claims accounted for just over 8% of all homeowners claims opened by U.S. insurers in 2019, homeowners insurance lawsuits in Florida accounted for more than 76% of all litigation against insurers nationwide.”
FIFTH – Increased exposures – As I type this, I received an email from a carrier notifying me of a customer who had a claim doing delivery. When I looked back at their application, they clearly stated that they did no type of rideshare or delivery. Maybe they forgot to tell us, or maybe they just started doing delivery and didn’t think we needed to know. I’m not sure, but the carrier is now having to deal with an exposure that they did not account for when they developed the insured’s premiums. Not to mention, in this particular person’s case, their auto insurance carrier does not provide coverage for people that do delivery or rideshare programs. Think about churches that now have live animals during certain events, or churches that provide sports programs for their community; these are all exposures that we pay for when we pay into our pool of premiums.
SIXTH – Loss of income from other sources – This is a big one right now – Inflation. What it costs to run a business in 2023 is more than in the past. If you have been to the gas pump or the grocery store, you have felt the effects of this on an individual level for sure. This item is even more magnified when you run a business. Many times, people think that insurance companies take their premiums and hide them under the cushion of the CEO’s chair. That’s not what happens. They actually take the money and invest it in other items in an effort to yield a greater return to offset premiums and increase liquidity. However, in times of inflation, that earning power is diminished. This means that insurance carriers must increase premiums in an effort to offset income that they would have made through other means. This is felt even more with increases in wages, benefits, and the general cost of business operations. Lastly, as much as it pains me to say it, businesses have been affected by the loss of work-force options since COVID, both at the corporate and local levels. Talk to any business owner and they will tell you about it. If you have called in to any type of major business lately, you may have spoken to someone located overseas. This is not by accident; it is by necessity. These are things that companies are now having to do in order to provide good service to their clients and maintain financial viability.
SEVENTH – location – It goes without saying that your location affects your premium in a huge way. If you are located near a major city, your auto rates will reflect it. If you are located near the coast, your home insurance rates will reflect it. The further south you go in Florida, the larger your premiums will be. If you move to a rural spot in the middle of the United States, there is a very good chance that your premiums will decrease.
Lastly, to wrap this up; there are a few more interesting things worth mentioning. First, Florida is not the most expensive state when it comes to insurance. We do rank in the top, in most categories, but we are not the most expensive of all. Currently, research by Clark.com from May 2023 shows Oklahoma as most expensive for home insurance and New York is most expensive for auto insurance according to a Forbes report from August 2023. Another fact is that premiums are not created at the local agency level. They are developed by carriers on proprietary rating systems and there are over 500 factors that go into creating the rates of one person in one zip code. Another interesting fact is that carriers who send fliers in the mail stating they can save you massive amounts of money are usually too good to be true. If they claim they can save you a disproportionate amount of money, there is a reason; and it is probably not a good one.
While increased costs are not something that is unique to Florida, they do typically have a greater impact on us here in the Sunshine State. If you have any questions about your policies, please give us a call and we will be happy to help you. As always, our goal is to educate you and help you find the best coverage to meet your needs.