Cost increases hit us from all angles—at the grocery store, the repair shop and yes, at our broker’s office. It may seem that our insurance increases every time we renew. Why is that? And is there anything you can do to reduce your costs?
To answer those questions, it’s helpful to first consider what we are buying when we purchase insurance, how insurance companies make their money, and factors that influence the cost of insurance.
Managing Your Risks
Insurance has been described as the ‘business of managing risks and protecting assets.’ Fundamentally, the responsibility of protecting your assets from damage or loss is yours to assume. However, when you buy insurance you are asking the insurer to assume the responsibility to protect the financial value of your assets. Should an asset be damaged, destroyed or stolen the insurer undertakes the responsibility to pay for its repair or replacement.
A second insurance fundamental is that ‘the losses of the few are paid by the premiums of the many.’ In other words, as the insurer collects payments (premiums) from you and me, and hundreds of other clients, they calculate that when the home, car, or other property of one of their clients is damaged or destroyed, they will have collected enough money to pay for the damages. They also project or hope that at the end of each year they will still have some money left over, which represents their profit.
What Drives up Insurance Costs?
Reinsurers Role in the Cost of Insurance
Like any other business, insurance companies require protection against risks, such as in the case of huge losses due to hundreds if not thousands of claims that are filed after catastrophic events or disasters.
Reinsurers provide “insurance for insurance companies.” They are the ones who set the rates for insurance companies, who in turn pass these rates on to consumers. Reinsurers take a global view of the insurance industry when setting rates. This means that disasters in one part of the world can affect the cost of insurance in other parts of the world.
What drives the cost of insurance? Premiums increase when the frequency and the cost of individual claims rise. There are four fundamental factors that drive the price of insurance up: 1) Climate change/catastrophes, 2) inflation, 3) construction costs, 4) volatility of the financial markets.
Climate Catastrophes. Climate changes have contributed to the increase in frequency and severity of extreme weather events, such as forest fires, windstorms, tropical storms, hurricanes, earthquakes, heavy rains, hail, quick thaws, etc. These events translate into water and other damage to homes and property. As a result, there are more claims and in many cases the cost of each claim is higher.
This is has become particularly critical in the face of the COVID-19 pandemic losses and the increase in natural disasters across Canada. Overall, the Canadian insurance industry faced losses of $2 billion in 2018 and $1.3 billion in 2019. One catastrophic event—the hailstorm that hit Calgary in mid-June of 2020, caused an estimated $1.2 billion in insured damages.
Such events prompt reinsurers to raise rates and/or limit coverages that they offer insurers. The insurers necessarily pass these rate changes on to the client. What this means is that policy holders, depending on the type of coverage and location of the properties they are insuring, will see increases, sometimes significantly at renewal time.
Do disasters in the rest of Canada or outside of Canada affect the cost of my insurance in British Columbia? Yes. Reinsurers work on a global basis. Therefore, an earthquake in New Zealand or forest fires in California impact insurance rates in Canada and around the world.
Inflation. Each year inflation eats away at the buying power of our money. As a result, the operating costs of insurance companies increase. At the same time the cost of each claim rises due to inflation’s effect on reconstruction and other costs.
Construction & Reconstruction Costs. Increases in construction costs are one of the biggest reasons why insurance premiums rise. For example, the cost of construction materials has seen a steady increase over the past 10 years. This means that the cost to repair damaged or destroyed property continues to increase. In turn, insurance companies are compelled to pay higher costs for the claims that they service.
General Economic and Financial Market Volatility. Both reinsurers and insurance companies rely heavily on the revenues that are generated by investing their customers’ premiums. Low interest rates, therefore, negatively affect reinsurers’ and insurance companies’ investment or revenues.
Also, increased claims payouts have meant that insurers have had less money available to invest in the financial markets. Worse still, when the financial markets are seriously depressed insurers face significantly diminished returns on their investments. These realities often force reinsurers to generate more income by increasing the premiums that they charge to insurers.
How to Reduce Your Insurance Costs
We know we need insurance. We also know that we don’t want to spend any more than we have to on it. So, how can you get good value for your money? Good value can be defined as:
- Obtaining adequate coverage of your assets
- Benefitting from insurance brokers’ expertise and advocacy
- Paying a competitive price
Buying insurance should be balanced against your risk-comfort level. First, ask yourself: ‘
Do I live in a high-risk area for earthquakes, freezing water pipes, or sewer back-up? Is theft or vandalism a big problem in my neighbourhood? What is the age and condition of my house? Is the possibility of something negative happening high, medium, or low? If my home was damaged in some way, or even destroyed, how much could I pay (or would I want to pay) out of my own pocket to repair or replace the damage. If the damage was significant, could I pay out of my own pocket, or might I face bankruptcy?
Once you answer these and other risk-related questions, you are then able to decide the level of protection that will provide sufficient coverage in the event of a loss. Your broker will be happy to assist you with this analysis.
Insurance Expertise and Advocacy
On the surface, it may seem that you can buy your insurance from anyone or choose any type and level of coverage you like . . . until you file a claim. The single most important factor that determines whether payment for your losses is adequate is to carefully select your insurance policy right from the start.
A carefully chosen insurance policy that precisely meets your needs at the lowest possible cost requires an independent insurance broker who has the expertise. They know the right questions to ask and they know the right answers. They will take whatever time is necessary to explain your options and help you understand differences so that you can make informed decisions.
An independent insurance broker also acts as your advocate at claims time to ensure that you are fairly compensated for your losses and have access to the full measure of coverage to which you are entitled. Buying insurance from an independent broker is a critically important way to get good value for your insurance money.
Although the cost of your policy is an important factor from a budgetary point of view, it is also important to carefully weigh the value of each insurance option. There are risks to buying the least expensive insurance. If we skydive, do we really want to buy the cheapest parachute we can find? It’s inexpensive, but there is no guarantee that it will really protect us when we need it.
Insurance is for times of serious need. The payments might appear high or hurt a little now, but having it is a way to protect your future and it gives you peace of mind during the trip there. To spend a fixed amount each month to pay for your insurance will appear insignificant when your vehicle or home is replaced due to accident or fire. The sad reality is that those with inadequate insurance rarely recover from their losses. No one likes surprises at claims time!
At the same time, getting good value for your insurance dollar does not necessarily mean premiums will cost more. In fact, getting good value will often cost the same, while providing better coverage.
An apples-to-apples comparison of one policy against another policy is one of the most important ways to ensure you are getting adequate coverage at a competitive rate. To achieve this, you need to do a comparison of the:
- Type of coverage being offered
- Level of payout for each type of coverage
- Deductibles and restrictions on each type of coverage
For example, suppose you bought your home insurance from Buy- Direct Insurance for the past 3 years. Each year they send you the renewal forms and the price has gone up by 10% each year. This year the premium is $1,200 for 12 months.
So, you decide to get shop your policy and get a quote from Joe’s Independent Insurance Brokers. At Joe’s Independent Insurance Brokers, they ask you if you have made any major upgrades to your home. You explain that you finished the basement and put in a rental suite. Joe’s Insurance crunches the numbers and their quote is $1,500 for 12 months.
Buy-Direct Insurance is offering better value, right? Well, it is less money, but it is not better value. What’s the problem? First, it’s not an apples-to-apples comparison. Buy-Direct Insurance didn’t ask about upgrades. Had they known about the upgraded basement and the new suite their price would more than likely have been significantly higher.
Here is the scary part. Assume you renewed your policy with Buy-Direct Insurance and a little later you have a kitchen fire in the suite that damages much of the house. Because you didn’t inform them about the finished basement and the new suite, your entire policy could be voided and your claim denied all-together, or the payment for the damages would be significantly less than the actual cost to repair your home.
This scenario highlights the importance of dealing with an experienced insurance broker and doing an apples-to-apples comparison of quotes. So, buy wisely. Carefully select a broker who can assist you to make well informed decisions. This will save you money now, and most importantly when you must file a claim. Now that is good value!
Each policy holder can play a role in reducing insurance costs. How? By taking preventive actions against losses. This includes preventive measures to protect your assets against theft, fire, floods, storms, cybercrime, and much more. Most of the preventive actions are simple, inexpensive, and effective. Reducing the frequency and the size of claims, in turn reduces the costs for everyone. Your efforts to reduce the number of claims is a win-win for everyone.
To learn all about these preventive actions, please visit our list of topics at: https://park.ca/about-us/our-blog/.
Please feel free to contact us here at Park Insurance Agency Ltd., for additional information on how to get great value and the most out of your insurance dollar.