Why Rates Rise and Fall
December 7, 2009
by Scott Westcott
Picture a hot-air balloon adrift in the sky. Not a homemade one, crafted for media attention, but a colorful quilt among many other balloons, floating over the land as part of a festival.
A person 1/100th of the balloon’s size adjusts the temperature and pressure, doing his best to guide the balloon along its way. Yet, the way the wind blows determines where his and others' balloons go.
And so it often is with insurance rates, too. A person can take some control of how insurance works for them in their life, but there are aspects to how insurance functions that are outside of anyone’s control.
“There are cyclical factors affecting rates that are beyond the consumer’s reach, and even beyond the control of insurance companies,” says Robert Hartwig, president of the Insurance Information Institute. “There are ups and downs to rates driven by a wide range of reasons.”
Storms are a big factor out of the control of both consumer and company —both economic and those of Mother Nature.
However, there are several actions you can take as a savvy consumer to potentially influence how much you pay each year. Start by knowing what aspects you can control, and which you can’t.
Out of your control: Rising inflation, nasty weather
Costs typically rise each year. For instance, motor vehicle bodywork—a major expense for insurance carriers—rose 4.9 percent in April 2009, compared to one year prior. (Thankfully, in the latter half of the year, those rates of increase have gone down.) Also, early in 2009, hospital services rose 7 percent and repair of household items rose nearly 3 percent.
“Generally, people should expect an increase of an inflationary nature,” says Gene Connell, ERIE chief actuary and risk officer. “For instance, insurance companies buy a lot of medical products and medical care. When those costs rise, insurance costs rise, too.”
Another factor that can’t be controlled is the weather. Severe weather in recent years has affected homeowners’ insurance rates, and not just in coastal areas prone to hurricanes.
Hartwig says that a rash of tornados, hailstorms and torrential rains in 2008-09 has led to more claims in the Midwest states. Rates, in turn, have increased in those areas at a faster pace than some other parts of the country. Insurance companies reassess the risks and calculate the cost of insuring homes in that region.
In your control: Your credit
Fortunately there are steps you can take to lower, or at least stabilize the premiums you pay for auto and homeowners insurance.
In general, fewer dings on your credit rating will likely have a positive influence on your insurance rates over time. Like many other carriers, ERIE uses insurance scoring as one factor in determining pricing. Insurance scoring draws from a range of factors to assess risk, including a review of your credit history. Today, nine out of 10 insurers consider insurance scoring when writing policies—a fact that often works to the advantage of consumers with good credit histories.
“It’s a fairer way to price,” Connell says. “If the predictors we look at say there is an 80 percent chance an individual will have an accident in the next three years, then we are going to charge that person differently than someone who is far less likely to have an accident based on the data.”
Hartwig says while the recent economic crunch has put credit pressures on consumers, it has also spawned smarter use of credit for many people.
“The recession has led to more average American households using credit cards less and saving more, and that can improve your credit-based insurance score,” Hartwig says. “The reality is the average person does have a favorable credit score and that works to their benefit when it comes to insurance.”
Some steps you can take to further improve your credit score include:
- Paying bills on time.
- Applying for credit only when necessary.
- Reviewing credit information annually.
In your control: Drive safely, save money
Another source of potential savings is to minimize your claims by driving safely. The fewer claims you have over time, the better your chance of reducing your premium compared to others.
Fewer accidents, tickets or violations all help identify you as a responsible driver. The cleaner your record, the better chance you have for rates that reward safe drivers.
“If you change your driving behavior and stop driving in ways that lead to tickets or accidents, those bad marks start falling off your record, and you become a preferred driver, which could lead to a lower rate on your insurance,” Connell says.
When it comes to car shopping, also keep in mind the vehicle you drive can influence your insurance rates. If you’re buying a new car, give your Agent a call before you sign on the dotted line. Rates vary for individual makes and models based on the type of car, safety records and ratings, potential repair costs and how popular the model is with thieves.
In your control: Make sure you’re covered
While there are ways to reduce how much you pay, insurance isn’t something to scrimp on. Sometimes saving a few dollars up front doesn’t pay if you don’t have adequate coverage for a significant claim.
“You want to make sure you have the right coverages,” says Connell. “An ERIE Agent can assess your situation and help you better understand your risk tolerance. You want to have that ongoing conversation with your Agent to make sure you are properly covered.”
Hartwig agrees, and says that insurance ends up being a bargain for those who find they have to use it.
“Say you’re paying $850 a year for homeowners insurance,” he says. “The reality is that you’re buying hundreds of times that amount in actual coverage. You are protecting your family and making sure you could rebuild your home in the event of a fire. Insurance is hands down the most cost-effective way to recover from a disaster or accident. You are buying peace of mind when you purchase insurance from a strong company like ERIE.”
Scott Westcott is an award-winning journalist and freelance writer, whose recent work has appeared in Parents, Inc., and Woman’s Day. He resides in Erie, Pa.
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