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Why Rates Rise and Fall

June 27, 2011
by Scott Westcott

Picture a hot air balloon adrift in the sky, 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 over the role insurance plays in their life and the price they pay, but there are factors affecting the cost of insurance that are outside 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 one big factor that is out of the control of consumers and companies — both economic and those inflicted by Mother Nature.

However, there are several actions that you, as a savvy consumer, can take 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
Insurance companies pay claims using the money collected from their Customers. Higher auto repair costs, high medical bills and increasing numbers of auto accident lawsuits have made claims more costly to settle. Erie Insurance does all it can to control expenses and offer low rates, but as the costs increase for goods and services, premiums must be raised to cover those expenses.

For instance, motor vehicle bodywork — a major expense for insurance carriers — rose 2.5 percent in April 2011, compared to the previous year. Last year, inpatient hospital services increased 8.8 percent and that trend is expected to continue for the next few years.

“Generally, people should expect an increase of an inflationary nature,” says Ross Fonticella, vice president of Commercial Actuarial at ERIE “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. Although catastrophe losses were about average for the insurance industry in 2010, the tornado losses in 2011 are expected to hit the$6 billion mark.

Other consistent producers of large-scale losses are thunderstorms and winter storms. Thunderstorms have quintupled since the early 1980s. Winter storm losses in 2010 are among the top five in U.S. history with losses totaling $2.6 billion.

Hartwig says that a rash of tornados, hailstorms and torrential rains in recent years 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 as insurance companies calculate the cost of insuring homes by region.

In your control: Safe driving, the car you drive

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 incidents fall off your record with time, and you become a preferred driver, which could lead to a lower rate on your insurance,” Fonticella says.

Keep in mind that the vehicle you drive can influence your insurance rates, too. 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.

According to the Insurance Institute for Highway Safety, a 2009 Dodge Charger, for example, would cost more to repair than a 2009 Ford Taurus, requiring the insurance company to charge more or less based on the type of car you drive.

“Whether you’re buying a new or used vehicle, it’s always best to review the vehicle safety ratings,” Fonticella says. “But even more importantly, be sure to give your Agent a call before you sign on the dotted line. He or she can quote you the price difference depending on the car you’re thinking of buying.”

In your control: Home maintenance

While owning your own home and doing the required maintenance on it can be expensive, failing to act may take a bigger chunk out of your checkbook.

“If you protect your home and do preventative maintenance, it will save you money down the road,” says William Matrogran, property and subrogation supervisor.
So what kinds of things should you look for? Here are few ideas:

  • Inspect your roof. Look for signs of age such as curling, shrinking or broken or missing shingles. To avoid costly leaks, repair or replace damaged or missing shingles.
  • Check for water in the bathroom around the shower and toilets. If these are leaking, serious water damage could result over time.
  • Clean out your gutters and check for ice damming in the winter. If ice blocks the gutters, water can back up under the shingles and ruin your roof or damage the inside of your home. Downspouts should be directed away from the house.
  • Turn off the water and drain the lines when leaving the house for extended periods. This helps to assure that you won’t have leaks or burst pipes while you aren’t there.
  • Make sure your washing machine hose is installed properly and is not worn. It can cause extensive water damage if it comes loose or breaks. Hoses should be replaced periodically.
  • Trim the limbs. Trees should be a safe distance away from the house and dead limbs or overhanging tree branches should be cut down. Limbs that touch electrical wires should be cut back.

“Your home is your biggest investment,” says Matrogran. “By taking the time to do some basic maintenance and clean up, you can protect yourself from costly claims.”

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.
Most 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,” Fonticella 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.”

Some steps you can take to improve your credit score include:

  • Paying bills on time.
  • Applying for credit only when necessary.
You should also review your credit score annually. You're eligible to request a free copy of your credit report each year through annualcreditreport.com or services such as Equifax Information Services at 800-685-1111 or Trans Union Corporation at 800-888-4213.

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 Fonticella. “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,” Hartwig 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 easily 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.”

This article was originally published in December 2009


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.