Why Your Insurance Premiums Just Went Up (and What to Do About It)
Have you noticed that your insurance premiums are going up lately? Going up a lot?
You're not alone. According to a new report out from Bankrate.com, more than one-third of U.S. consumers say their insurance costs grew in 2012. In a few cases, this was because people had more things to insure -- they bought a new house, or a second car, or perhaps brought home a new baby, who needed some health insurance. But in the majority of cases -- 62 percent -- consumers say they're paying more simply because their insurance company is charging more.
Insurance professionals estimate the average homeowner's insurance premium has risen 10 percent per year every year since 2008.
What's Behind the Hikes
But is this a case of insurers price-gouging their customers? Or are there legitimate reasons for the rising rates? Actually, it's the latter.
Insurance Information Institute spokesman Michael Barry points out that between "Hurricane Irene, the Joplin tornado that was the single biggest insurance event in Missouri history, and widespread winter storms, tornadoes and flooding in interior states like Minnesota," the past decade has been one of the costliest in terms of natural disasters in U.S. history. And because insurance companies bear a large portion of that cost, it only makes sense that they might need to charge higher premiums to pay for all the claims they've been receiving.
Health care costs, too, are on the rise -- leading to higher premiums for that flavor of insurance as well. Consumer Federation of America insurance director J. Robert Hunter blames health insurance for much of the inflation indicated in the Bankrate survey.
But the real reason is bigger than either of these explanations.
The Float is Sinking
On one hand, yes, insurance companies of all stripes are spending more to satisfy customer claims. The increased costs these companies face drive them to raise their rates to recoup their expenditures. But that's only half of the problem.
To understand the other half, you need to understand how insurance companies work -- how they make their money. This basically consists of three steps:
Step 1 is, of course, to collect premiums.
Step 2 is to invest the money from those premiums until it comes time to pay out on a claim. An insurance company doesn't just put the money under a mattress after cashing your premium check. Rather, it takes this money -- called "float" in industry parlance -- and invests it in the corporate bond market, in federal savings bonds, and in the stock market.
Here's where the problem begins: The interest rates insurers have been getting on their bond investments have been frightfully low these past few years. Similarly, the stock market is in a funk. It's been doing well these past few weeks, true. But the bigger picture shows that the Dow Jones Industrial Average, for example, still hasn't regained its highs of October 2007. That means that for more than five straight years, insurers haven't earned anything on their stock holdings.
And this brings us to Step 3, which is the real problem. Insurance companies were counting on profits from the stock market (and the interest on those bonds) to help cover their costs when it finally came time to pay out cash to satisfy insurance claims. Those profits simply haven't materialized, and as a result, insurers need to find money somewhere else in order to make good on insurance claims from their customers.
Guess where they found it?
That's right. They found it in your wallet. In order to make up the difference between the money they thought they would have, and the amount they actually wound up with, insurers are raising prices. It's really the only solution for them -- and even then, insurance professionals say that there's been little or no profit for insurance companies in homeowners insurance since about 2008.
What Can You Do?
Of course, that's small consolation for those of us footing the bill for the insurers' miscalculation. So what's the solution?
Bankrate offers several ideas for cutting costs, ranging from raising the deductible on your homeowners and auto insurance policies, to dropping collision coverage on an old car, to buying home and auto insurance from the same company. (When you "bundle," insurers will often give you a discount.)
Probably the best thing you can do to mitigate rising insurance costs, though, is shop around for a better deal. Bankrate notes that in some cases, an hour spent on the phone calling insurers and comparing rates can save you in excess of $200 a year. Even if you don't have an hour to spare, though, you can still shop around by asking an insurance broker to do the comparisons for you.
It could "save you 15 percent or more on your car insurance," as one famous lizard famously promised. With any luck, it could even get you back to the prices you were paying before the lizard -- and everyone else -- began raising their rates.
Motley Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has no position in any of the stocks mentioned.