Insurance 101: Insurance Premium Control

Every year, policyholders receive their insurance policy renewals, and many ask the same question: "Why are my premiums increasing?". There are many factors that are both in and out of your control as a policyholder. Best practices, agent advocacy and self-study on your insurance program will aide in the evaluation and tailoring of your personal insurance program. The goal is to have the best balance of appropriate coverage and competitive premiums. JMP

Regional Loss Criteria

Depending upon where you reside, there are many natural perils that can vary, state by state: Wind in Florida, hail in Texas, flooding in Louisiana, earthquakes in California, wildfires in Colorado – just to name a few, high severity perils that can be covered by personal insurance. The higher the likelihood of property damage in certain, catastrophe-prone areas, the higher your property premiums will be. Certain insurance companies may not offer coverage in particular states, or regions due to the escalated risk of significant property loss. Other high-risk insurance carriers may offer specialty coverage that is designed for that region or state’s highest property risk(s). Certain states may have a state-run program, commonly referred to as a "pool", designed for policyholders to qualify for high risk coverage.

"But I don’t file claims?! Why are my premiums going up, simply because other people are filing claims?" -That is a very real and very common question, and the answer is complicated. Insurance companies are not raising premiums and mandating rate increases for the sake of charging you more, there are rules against that. The driving force is that insurance companies are paying out significantly more in claims, and it is difficult to sustain healthy profit margins and reserves.

A large-scale weather event or catastrophic loss can put smaller insurance companies out of business; others may have to take more rate to balance out losses in a given year (or series of years) to recover from staggering claims payouts. While some increases can be significant, many insurance companies will levy smaller premium increases, over the span of several years, rather than rolling out a significantly higher, one time rate increase.

According to a study in ThinkProgress, and confirmed by the Insurance Information Institute: ‘Natural disasters cost policyholders approximately $175,000,000,000 (billion) in 2016, and insurers paid around $50,000,000,000 in natural disaster-related claims, the highest amount since 2012, according to an annual report by reinsurance company Munich Re.’

Some policyholders will forego ‘specialty coverages’ that are elective or otherwise, voluntary: Flood, Earthquake, Sinkhole, Wildfire, Excess Wind, etc. The higher your likelihood for a large-scale property loss, the more important it is to address your concerns with your agent, to understand your coverage options.

Underwriting Criteria

Your family’s profile is evaluated on many levels with any insurance company. Risks are scrutinized and priced accordingly, based upon actuarial factors and likelihood of losses. A few things that may negatively impact premium: gaps in insurance coverage, frequently changing insurance carriers, filing multiple claims, being cited for traffic tickets, poor credit, a property’s proximity to responding fire departments, or a history of filing small claims. Young drivers will generate higher premium based upon their lack of experience behind the wheel, and a higher likelihood of being involved in an at-fault accident. High profile professions such as athletes, entertainers, politicians and executives can cause insurance companies to pass on a program based upon the probability that the policyholder or family will have a greater chance of being sued, if there is an accident or allegation filed by another party.

Inflationary Factors

Your home, condo or apartment’s coverage will increase at renewal, even if you don’t request a coverage increase; this is largely due to inflationary costs that are commonly used by property insurance companies. Most property owners are underinsured, and in the event of a large loss, property insurance is only as broad as the policy limits on your policy declarations. Property insurance companies control the trend of underinsured property owners by increasing the dwelling coverage, personal property and other structures, as a way of properly protecting your largest investment. Policyholders may forget to report that their home has undergone a renovation, improvement or major purchase, and establishing a slight increase for inflationary costs is a way to assist policyholders with appropriate coverage, over time. When values reach a point that they need to be reviewed and adjusted, it’s a conversation that your agent and the company underwriter should have, to ensure that coverage is in line, and appropriate to each individual property.

New and Emerging Cost Components

In the last 20 years, technology advances have soared, and this has a direct impact on your premium. Automobiles, for example, have higher-end components, sensors, cameras and underlying technologies that were not in autos even 10 years ago. All of this significantly increases the costs for parts, labor and repairs, even in a seemingly minor accident. High-end luxury and exotic autos typically require certified repair shops and highly trained technicians to properly tear down and repair vehicles, and that can add to the down-time of a claim while those repairs are completed, or while parts are shipped from overseas, and assembly conducted upon receipt.

The trend of ‘distracted drivers’ is an industry-wide issue with auto insurance companies. Losses have soared with the advancement of handheld devices, video and text messaging. Hands-free technologies have been implemented on new autos to curtail distracted driving, and improve driver safety, but the loss numbers keep rising, year on year.

In the property market, homes can be equipped with state of the art technologies and ‘smart’ technologies that can essentially run systems from your mobile device. You can now, remotely, start your car, unlock the doors to your home, turn on lights, start the oven, heat the hot-tub; the technologies in home customization are endless (and expensive). Green building materials, commercial-grade HVAC, rack servers and state-of-the-art media rooms can add significant value to your home. It’s important to relay any major renovation with your agent, while you are in the planning stages, so coverage options can be discussed, priced out, and agreed upon.

Risk Tolerance

Insurance premiums can be evaluated and controlled by several factors: coverage limits, deductible limits, and agency/agent selection. While the insurance company may require your property to be insured to value (or their valuation criteria), you can tailor your coverage on other lines of coverage such as other structures, personal property, or personal liability. The most logical way to control premiums is to establish a deductible that you can comfortably absorb in the event of a loss. Traditionally, the higher the deductible, the lower the premium – because the risk to the insurance company is lesser than that of a low deductible and higher likelihood of a filed claim. Self-insurance is a very risky venture, and even the most affluent individuals and families need to address their risk tolerance with their agent, and discuss higher deductibles as a more suitable option.

Your selection of an agent is also a critical factor in evaluating your coverage and overall costs. Specialty agencies and brokers typically have a broader array of products and services to offer, compared to that of a 1-800 or direct-market insurance company. Having an agent with access to multiple insurance carriers means multiple options for clients, and if one company is not a good fit, there are other options that your agent or broker can find and discuss with you. The relationship with your agent and the insurance company is crucially important, as well. A top-performing agency has the capability of gaining approval and accommodations with the insurance company on unique risks, more-so than an agent with very little business or tenure with the same company. In the event of a difficult or complicated claim, a great relationship between your agent and the insurance companies claims management, is also a significant advantage.

Policyholder Objectivity

Insurance companies and insurance policies are not uniform; coverage differs state-by-state, even with the same insurance company. Different insurance companies utilize different policy definitions, coverages, exclusionary language, deductible options and underwriting requirements. It’s important to utilize your agent or broker’s knowledge of competing insurance companies that are appropriate for your unique portfolio.

Some insurance companies are easy to outgrow as assets and exposures expand, over time. Some insurance companies may not be the right fit for an emerging program, or for a ‘starter policy’. It’s a discussion that you should have with your agent or broker, every renewal: evaluate the health of your policies, discuss any coverage revisions that may be needed in keeping with your family’s overall protection through insurance.

The best way to approach your policy renewals is to have an agent evaluate, explain and monitor your policies, proactively. When coverage trends and shifts impact the insurance market, or when your family’s needs change, there are ways to ensure that you have the best, individualized coverage for your unique program. Staying proactive about your renewals will also keep costs and coverage in line, over time.

Jason M. Pond

Personal Risk Management

972-715-8703 – Direct / 972-342-8645 – Mobile / [email protected]