5 Reasons Your Insurance Increased After a ClaimJune 6, 2019
A generally-held belief is that insurance companies will automatically raise your premiums after you have a claim. Although it can be true that the result at your next renewal is less cash in your wallet because your insurance costs have increased, the reason is usually a bit more nuanced than an automatic general premium increase levied on you by your insurance company.
If the end result is indeed a premium increase, you may find yourself wondering if the “why” really even matters. The reason it is important to understand the nuances behind how insurance works is that it gives you an opportunity to make better informed buying decisions relating to your coverage and, ultimately, the company you choose to do business with.
Here are 5 common reasons your insurance increased after a claim:
1. You Were Previously Receiving a “Loss-Free” Discount
What is a “Loss-Free” Discount?
A “Loss-Free” Discount is an incentive insurance companies can offer to accounts they deem as a more favorable risk, i.e. insured with no or low history of claims.
Insurance companies like to offer an incentive for responsible property ownership and prefer to write policies for what they consider to be good risks. In other words, insurance companies prefer to write policies that cover property that is in good repair and has a history of either no claims or none in the recent past. Oftentimes, “recent past” refers to around the 3 most recent years.
Still, insurance companies will often write insurance policies for insureds and their properties even if claims have occurred in the past 3 years. After all, these individuals still need insurance, and, many times, they may have simply been on the receiving end of some very bad luck.
However, on a statistical basis, insurance companies look at accounts that have not had prior losses as being a more favorable risk. In order to offer the most competitive pricing to accounts that have no prior losses, some insurance companies offer a “Loss-Free Discount”.
Are “Loss-Free” Discounts Worth It?
The short answer is sometimes. Loss-Free Discounts can be a great way for insureds to save money, and sometimes a lot of it. But, they are also dependent on you maintaining a “Loss-Free” status with the insurance company. So, it is important to be aware of the discounts that are applied to your policy. Sometimes, a policy that is a bit higher in premium cost without a Loss-Free Discount is a better way to go because the credits the insurance company applied to make their final premium numbers competitive are not contingent upon your past or future loss activity.
For example, let’s say that you are offered two policy options by an independent agent. One policy is $100 less in premium, but has a Loss-Free Discount applied which reduces the policy premium by 10%. For illustrative purposes, let’s assume 10% equates to a $1,000 savings. The other policy is $100 more expensive, but this company’s base rates are actually lower and they do not have a Loss-Free Discount available.
You could save $100 by going with the policy containing the Loss-Free Discount. But, if you have a claim, you will lose the Loss-Free Discount at the next renewal and end up paying $900 more than the second policy would have cost you.
In this occurrence, the first company did not “raise” your rates because you had a loss; you simply were no longer eligible for the discount you had been previously receiving. For this reason, it is important to consider if a Loss-Free Discount is the best deal when you are selecting which company’s application to sign.
2. You Were Put Into a Different Tier
Insurance companies will often offer their pricing in tiers. You may have been eligible for a very favorable tier prior to having a loss. These pricing structures are more often seen in personal types of insurance like homeowners and car insurance policies.
What Determines Your “Tier” in Insurance?
The stipulations for that pricing tier may be determined upon your payment history, your past claims occurrences, your driving record, or other actuarial statistics that the insurance company uses to help predict the favorability and profitability of writing insurance policies for clients like you.
The tier is based on parameters that are automatically applied given the specifics of your account and the rates in each tier are predetermined. Contrary to what may seem to be occurring, this tiering isn’t arbitrarily based upon any one individual’s decision to increase your rates, but instead set by algorithmic measures.
When writing what is considered to be “homogenous” types of risk or risks that are similar in type and exposures, like most homeowners insurance, insurance companies use statistics and the law of large numbers to determine how to appropriately price an account.
Based on the prior loss experiences of all of their customers, the insurance company can more accurately predict the percentage of accounts that will experience claims and certain specific situations may indicate a greater likelihood of a future claim. One of these indicators is “prior losses” and, as such, having a claim on your account may place you in a less favorable tier upon renewal.
3. You Lost a Safe Driving Discount
Similar to a Loss-Free Discount, if you are cited as being at-fault in an auto accident that results in a claim payment, you may lose a Safe Driving Discount. If you had no accidents or driving violations within the past 3 years when your policy was initially written, there is a good chance that you were receiving some discounts for being a safe driver.
Your insurance company wants to insure safe and responsible drivers and the best indicator that you fall into that description is the lack of claims or tickets on your Motor Vehicle Record (MVR). While many people worry that a speeding ticket will cause their insurance rates to increase, it is typically unlikely that an insurance company will randomly re-run your MVR after the initial inception of the policy and then surcharge your premium because of a ticket.
However, when there is an accident and a claim payment is triggered, the insurance company will likely look into the occurrence and pull an updated MVR. They may uncover a recent speeding ticket at this time in addition to any citations for the accident. If you were at-fault in the accident, you likely got a citation for reckless or careless driving, at least.
These citations can cause the repeal of your Safe Driving Discount, which results in your premium increasing, even though the insurance company did not actually “raise” your rates.
4. A Claim Informs Your Insurance Company of New Risks or Exposures With Your Account
Businesses evolve and change over time. Business owners look for new revenue streams and are innovative in finding new ways to make money. With these expansions come new and different risks and liability exposures that may not have been present when the business insurance policy was initially purchased.
Perhaps a manufacturing company started out machining parts for hand tools, but a business opportunity arose and now they are manufacturing wheel bearings for automobiles. These two things have inherently different risk factors and many insurance companies may not even have an appetite for both aspects of the business’s operations.
If the insurance company didn’t know about one of these operations, they likely were not rating the policy in such a way to take into consideration the risk or exposure they are (unknowingly) insuring. If a claim was to occur relating to an aspect of the business that the insurance company has not been made aware of, they will likely seek to properly “rate” for that liability exposure going forward. This may result in a premium increase, but not because they have raised the existing rates.
Instead, they are pricing the policy based on the actual scope and scale of the businesses operations that they were not aware of prior to the loss. In some worst-case scenarios, if the type of risk is outside of the parameters of the company’s appetite, they may seek to non-renew the policy because the business is no longer within the type of risk they are comfortable insuring.
5. Your Account’s Profitability Was Re-Evaluated
In addition to the reasons outlined above, there are still some cases when insurance companies and their underwriters will look at an account following a loss and re-evaluate its profitability. This is more common with commercial types of policies.
How Do Insurance Companies Evaluate Profitability?
Insurance companies evaluate profitability by looking closely at loss ratios in order to determine if, over time, the losses incurred are trending above the premium paid. If the account is experiencing a high volume of high-dollar claims, the company may decide that their pricing is unsustainable and decide that a premium increase is necessary if they are to continue to offer insurance.
It is not customary for this to occur after just one loss, whether big or small. However, a frequency of claims may raise red flags and initiate a discussion. It is important to remember that insurance companies are for-profit businesses – in order to pay claims and their operating expenses, the hard reality is they must make more money than they spend.
For that reason, the best pricing and discounts are allocated to insureds on the basis of predictive modeling and actuarial statistics. It’s certainly not a pleasant circumstance to open your insurance renewal and realize that your premium has increased after you experienced a claim, but it is important to understand the “why” behind the increase. You can then appropriately determine if it’s time to shop your coverage or simply wait until you become eligible for those policy discounts once again.
If you are having difficulty finding the right price-to-value combination in an insurance policy after a claim, call one of our experienced agents at 1-800-537-6880 or 717-665-2283 and they can help you to determine what options are available to you.
Disclaimer: Information and claims presented in this content are meant for informative, illustrative purposes and should not be considered legally binding.