If the price you pay for car insurance goes up every year, or even every six months, you are not alone. Even when you haven’t made any claims or logged any traffic violations, there’s a good likelihood that you are seeing at least a slight increase each year. Of course, even seemingly small changes in some of your individual risk factors (i.e., you started driving a different make or model car) can potentially result in a higher premium. But, as you might have guessed, it’s not always your individual behavior that triggers an increase in premium.
In order to remain profitable (and be able to pay claims) insurers need to collect, on average, about as much premium as they pay out. As real or anticipated expenses rise, insurance companies must figure out how to distribute the cost of those expenses. Anticipated risk associated with statistically similar groups of drivers is a central component for these decisions. But it is often the case that the expenses associated with paying claims rise generally across the state, and are offset with premium increases that affect most, if not all drivers. Think of expenses that tend to trend upward in all parts of the economy: factors that affect increases in the cost of living (for example, health care, salaries, etc.).
Common Reasons for Premium Increases: Individual Risk Factors
Let’s start with some of the more obvious reasons why your individual rate (premium) may have increased over the years. These reasons may include having filed a new claim or having had a traffic violation added to your driving history, adding or changing a vehicle, adding or changing a driver and increasing the amount of your coverage. Of course, if you have multiple drivers on your policy, the possible reasons for annual increases multiply.
Except in the cases of very minor claims, usually less than $1,000, and minor traffic violations, like a broken tail light, any new claim or violation is going to make you appear riskier: all these behaviors are associated statistically with increased risk exposure. If you add a vehicle, then there is something additional to insure, so your price will probably go up. Even if you switch the vehicle you have to one with a different make, model or year, your price may go up if your insurance company thinks the new vehicle itself is not as safe or more expensive to fix. Similarly, adding or changing a driver may increase the price you pay. Lastly, if you decide to increase the coverage limits, add optional coverages or reduce the deductibles on your policy, then your price is likely to go up.
The Less Obvious Reason for Annual Increases
Now let’s consider some of the not-so-obvious reasons for a price increase.
These may include one or more of the following factors: the gradual or sudden reduction of what are sometimes called “new business” or “disappearing” discounts; rate level changes; or specific rating factor changes.
Decreasing or “Disappearing” New Business Discounts
You may not have realized that some discounts you receive, usually when you first purchase your policy, are created as new policyholder incentives. Think of these as special offers for switching to a new company. You may get a particular discount for your first policy term as an initial offer, but then have it roll off after the first term is over. Sometimes, instead of the discount rolling off fully, some discounts may decrease gradually over more than one policy term.
Rate Level Changes
Another very common reason for a premium increase comes in the form of what is called a rate level increase. Rate level increases come about when an insurance company finds that their overall rates are too low given the expenses (losses) incurred from recent claims that have been submitted, and on trends in the industry towards more expensive repair and medical costs. Repairs and medical costs are almost always on the rise, so overall rate decreases are a very rare occurrence. Chances are that if your rates have gone up every year, and none of the above reasons seem to apply, your annual increases are coming from a general rate level increase.
Individual Risk Factor Weighting
Finally, your insurance company may re-evaluate how risky each of the characteristics, or factors, of your policy is, based on updated data. An insurance company may react to the results of such an analysis by increasing specific rating factors (and potentially decreasing others).
As you can see, there are some obvious and some not so obvious reasons for the price of your car insurance to go up every year. Whatever the reason is, be assured that not all insurance companies will charge the same amount for the same coverage. That’s why it’s important to shop around occasionally for a better price if you feel your insurance has increased too much. Annual increases are very typical across the industry, but the way that your risk factors are viewed by any particular company may vary.
To make sure you aren’t paying too much, you should know your coverage and discounts to ensure you are getting the best price for the coverage you need.