Why Are My Insurance Rates Going Up? May 2011 Newsletter
A question I've been asked a lot lately is why are their home insurance rates going up?
Home insurance rates are based on several factors. The factors that affect your rates directly are:
If you live in an are where the cost to rebuild is higher like on the islands with limited access or materials has to be shipped by ferry. Then the cost to rebuild is higher than one in the city.
If your home uses high end materials like hardwood floors, solid oak wood cabinets, etc. Then naturally, the cost of materials to rebuild your home is more expensive than those which uses vinyl carpet or laminate floors.
Having features like stained glass windows, skylights, two kitchens, a huge bathroom will bump up the cost to rebuild your home
All these factors determine what is called the replacement cost for the building or the house structure.
With the cost of raw materials going up as well as gas prices. It is costing more and more to insure your home and keep the insurance companies profitable in the event of a claim.
You may be asking yourself, I live in a strata condo/townhouse. I'm only insuring my contents, so why is my insurance premiums still going up?
There are other factors that affect insurance premiums other than those mentioned above. These are determined by the insurance companies and it is their internal basis for factoring the premiums they charge. These are:
For example, if you are insuring your personal property (contents) for $50,000. It is logical to assume that next year, the cost to replace your property is going to be higher than $50,000. It may cost $50,200. Since your insurance coverage is higher, your insurance premiums also go up.
You may be asking yourself, "but my stuff is old, why are the insurance companies increasing my coverage?" The reason is, when the insurance company replaces your property in the event of a claim., they don't buy you used property. They buy you brand new furniture, TV, clothes, couch, etc.
Since it may be 10 years after you first insure your property before you have any claim. Naturally, prices 10 years from now are going to be higher than today. The only properties that usually go down in prices are TVs and computers. But 10 years from now, they will no longer have the same model TV that you currently have. So the company has to replace it with a newer TV. But they will replace it with the same brand, size and the model closes to what you had before you had the claim. That's why your insurance coverage goes up every year.
One thing you have to remember though, the percentage increase in your insurance coverage is not proportional to the increase in your insurance premiums because there are other factors affecting the premiums.
The company's capital reserve requirements can affect the rates you pay as well. Insurance companies are required by regulators to prove they have enough capital reserve to pay claims. Meaning, their assets must exceed their liabilities (risks insured). If they experience a year or two with a lot of claims or they have one really large claim, those claims may eat up their capital reserve which in turns reduces their assets.
When their assets are reduced, they have to bring it back up to the reserve requirements. This is similar to your condo corporation's reserve funds. If your condo corporation's fund are low, expect your strata/condo fees to go up to build up the reserve.
Insurance companies also invest the premiums they collect until a claim is paid. Because these premiums are expected to be paid out, the insurance companies cannot invest in high risk investments like stocks. They are limited to liquid investments like bonds.
Because we are in such a low interest rate environment, insurance companies have a hard time making money from these investments. This low return makes it harder for companies to maintain their reserve requirements so they have to make this up by increasing their premiums.
Normally, a year or two of low interest rates won't affect your premiums by much. But we've had low interest for over 2 years now and the insurance companies don't expect the interest rates to go up by much in the near future.
These are just a few of the factors that affects your insurance rates. You should review your coverage regularly to see that it still fit your needs and whether any changes needs to be done.
Home insurance rates are based on several factors. The factors that affect your rates directly are:
- Location of your home
- Cost to rebuild in your area
- Materials used
- House features
- Dollar amount of coverage
If you live in an are where the cost to rebuild is higher like on the islands with limited access or materials has to be shipped by ferry. Then the cost to rebuild is higher than one in the city.
If your home uses high end materials like hardwood floors, solid oak wood cabinets, etc. Then naturally, the cost of materials to rebuild your home is more expensive than those which uses vinyl carpet or laminate floors.
Having features like stained glass windows, skylights, two kitchens, a huge bathroom will bump up the cost to rebuild your home
All these factors determine what is called the replacement cost for the building or the house structure.
With the cost of raw materials going up as well as gas prices. It is costing more and more to insure your home and keep the insurance companies profitable in the event of a claim.
You may be asking yourself, I live in a strata condo/townhouse. I'm only insuring my contents, so why is my insurance premiums still going up?
There are other factors that affect insurance premiums other than those mentioned above. These are determined by the insurance companies and it is their internal basis for factoring the premiums they charge. These are:
- Inflation
- Replacement Cost
- Capital reserve requirements
- Investment returns
For example, if you are insuring your personal property (contents) for $50,000. It is logical to assume that next year, the cost to replace your property is going to be higher than $50,000. It may cost $50,200. Since your insurance coverage is higher, your insurance premiums also go up.
You may be asking yourself, "but my stuff is old, why are the insurance companies increasing my coverage?" The reason is, when the insurance company replaces your property in the event of a claim., they don't buy you used property. They buy you brand new furniture, TV, clothes, couch, etc.
Since it may be 10 years after you first insure your property before you have any claim. Naturally, prices 10 years from now are going to be higher than today. The only properties that usually go down in prices are TVs and computers. But 10 years from now, they will no longer have the same model TV that you currently have. So the company has to replace it with a newer TV. But they will replace it with the same brand, size and the model closes to what you had before you had the claim. That's why your insurance coverage goes up every year.
One thing you have to remember though, the percentage increase in your insurance coverage is not proportional to the increase in your insurance premiums because there are other factors affecting the premiums.
The company's capital reserve requirements can affect the rates you pay as well. Insurance companies are required by regulators to prove they have enough capital reserve to pay claims. Meaning, their assets must exceed their liabilities (risks insured). If they experience a year or two with a lot of claims or they have one really large claim, those claims may eat up their capital reserve which in turns reduces their assets.
When their assets are reduced, they have to bring it back up to the reserve requirements. This is similar to your condo corporation's reserve funds. If your condo corporation's fund are low, expect your strata/condo fees to go up to build up the reserve.
Insurance companies also invest the premiums they collect until a claim is paid. Because these premiums are expected to be paid out, the insurance companies cannot invest in high risk investments like stocks. They are limited to liquid investments like bonds.
Because we are in such a low interest rate environment, insurance companies have a hard time making money from these investments. This low return makes it harder for companies to maintain their reserve requirements so they have to make this up by increasing their premiums.
Normally, a year or two of low interest rates won't affect your premiums by much. But we've had low interest for over 2 years now and the insurance companies don't expect the interest rates to go up by much in the near future.
These are just a few of the factors that affects your insurance rates. You should review your coverage regularly to see that it still fit your needs and whether any changes needs to be done.
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