If you’ve noticed that your insurance premiums are going up, you’re not alone. Many people are wondering why their insurance costs are rising and what factors are behind this trend. In this blog post, we’ll explain some of the main reasons why insurance rates are increasing and how they affect you as a client. We’ll also give you some tips on how to protect yourself from paying more than you need to for your insurance.
What are the main factors that affect insurance premiums?
Insurance premiums aren’t fixed. They can change over time depending on various factors that affect the risk and cost of providing insurance. Some of the main factors that contribute to rate increases are:
1. Claims frequency and severity
This refers to how often and how much the insurance provider has to pay for the claims of its clients. The more frequent and severe the claims are, the higher the premiums will be.
One of the basic principles of insurance is that the premiums of the many pay for the losses of the few. In other words, the insurance provider collects premiums from many policyholders and uses them to pay for the claims of the few who suffer losses.
Currently, losses are happening more often and are more severe. This increase in claims frequency and severity affects rates across all kinds of insurance worldwide. Two factors contributing to this increase are weather-related losses and water damage claims.
- Weather-related losses are one reason for increased claims frequency. The insurance industry has seen a significant rise in the number of weather-related claims in recent years, such as rain, wind, and snow. Extreme weather, such as floods and wildfires, causes bigger and more frequent catastrophic losses. The Insurance Bureau of Canada estimated $3.1 billion in insured damage in Canada in 2022. Some of the major events that caused significant losses were:
- Hurricane Fiona, which was estimated at $800 million in covered losses.
- BC Floods, which were estimated at $675 million in covered losses.
- The 2023 wildfire season was described as the most destructive fire season for BC to date.
- Water damage claims are partly to blame for increased claims severity. Some reasons water damage claims are costing more include:
- We’re seeing more expensive appliances and finishes in homes, which are considerably more costly to repair or replace.
- Inflation is affecting claims severity because the cost of handling a claim has been increasing every year.
- Claims clean-up costs are also increasing. There are stricter regulations on restoration procedures when handling asbestos and mold. The contractors must now follow certain procedures during demolition, clean-up, and reconstruction, which has significantly impacted the cost of handling these claims.
- Labour shortages and supply chain delays are also contributing to higher claims costs.
2. Higher interest rates
Interest rates affect the cost of borrowing money, which is passed on to the clients in the form of higher premiums. Higher interest rates also affect the cost of construction loans, which are built into the estimates of rebuilding or repairing damaged properties.
3. Reinsurance costs
Reinsurance is a way of transferring some of the risk that insurance companies have when they insure people or things. Reinsurance is like insurance for insurance companies. It helps insurers reduce their risk if a big disaster happens, such as a hurricane or an earthquake. In the same way that insurance spreads the risk for our clients, re-insurance spreads the risk for insurance companies.
Reinsurance also allows insurance companies to offer more coverage to more clients, because they share the risk with other companies. Reinsurance is an important part of the insurance industry because it helps make the market more stable and efficient. Reinsurance also protects the clients of insurance companies, ensuring that they will get paid if they make a claim.
Reinsurance costs are on the rise just like other insurance rates. Higher interest rates and loss experience affect reinsurance costs, which in turn cause higher premiums. Higher reinsurance costs are also caused by bigger catastrophic losses from extreme weather such as wildfires and floods.
4. Insurance limits (dwelling values) are on the rise
The cost of replacing, repairing, and rebuilding is constantly increasing. These increases impact the amount of insurance that you should have. It’s not uncommon for a house that would have cost $500,000 to rebuild a few years ago to now cost $800,000 to rebuild.
With reconstruction costs on the rise, it’s important make sure you have adequate coverage on your dwelling as well as any detached structures (buildings, fences, walkways, paths, driveways, patios, retaining walls, ornamental pools, etc.)
What is a hard market and how does it affect you?
We’re in a hard market right now. A hard market is a period when insurance premiums go up, coverage terms become stricter, and insurance supply decreases. This happens when insurance companies face financial challenges, and the cost of buying reinsurance goes up. Insurance companies become careful about the risks they accept and premiums for higher-risk areas are increased. A hard market can make it more challenging for consumers to find affordable and adequate coverage.
We hope this blog post has helped you understand why insurance premiums are increasing. At Westland Insurance, we’re here to answer any questions you may have about rising insurance premiums and help you find the right insurance for your needs and budget. Contact us today to find out how we can help take the stress out of insurance and provide you with coverage that goes further.