Why Does the Cost of Insurance Increase?

Friday, April 5, 2013

Why Does the Cost of Insurance Increase?

Most people over-emphasize the effects of their own habits on their insurance costs. In other words, safe drivers with no accident records are often surprised when their car insurance premiums are increased, or home owners with responsible habits struggle to understand why they pay a higher premium if their addresses and habits have remained the same.

Many other factors can increase insurance costs, most of them are beyond the individual's control and many of them influence all insurance companies so that even careful insurance shopping will not help.



Here is a list of the most common factors that increase insurance premiums:

  • In general, the cost of insurance depends on the risk that the insured population holds for the insurance industry. This is painstakingly calculated by statisticians at the beginning of every year for each age group, gender, area and for the whole country. If the losses that the insurance industry has to cover increase, you will carry a proportion of the increase, regardless of whether you contributed to the losses or not.

  • With the increase in global warming and a corresponding rise in extreme weather phenomena, insurance premiums will continue to increase. This holds for both auto and home insurance. If your home is in an area that has become a greater risk for floods, fires, tornadoes and hurricanes, you will be hardest hit.

  • Your house is hostage to the quality of services that your city provides. For example, if your municipality has had trouble to maintain its sewer system, your home insurance will rise to compensate insurance companies for the increase in sewer backup claims.

  • With the ability and tendency of people to collect more expensive electronic equipment around their homes, home insurance will increase to compensate insurance companies for the larger pay-outs on household content.

  • There are more accidents in big cities with dense traffic than in smaller towns. So if you move to the city, expect an increase.

  • If you add another driver to your policy, an increase in your rate is inevitable.

  • The more expensive the car you buy, the more expensive insurance for it will be.

  • Insurance types are often linked to each other. For example, car insurance is linked to the cost of medical services, since it tends to cover injuries suffered in an accident. As a result, if medical costs increase, so will the premiums you pay on your car insurance policy.

  • Auto insurance costs are also linked with car prices and car repair costs, and will increase if these rise.

  • The Canadian Financial Services Commission may suddenly approve insurance company requests for increased insurance costs. Whether insurance companies will obtain such approval or the amount for which it will be obtained are not always predictable ahead of time. That is why your premiums sometimes increase very suddenly and by a lot.

Since insurance costs are a function of our own habits, of the habits of our neighbours and of factors in the wider economy, premium increases can arise from various sources.