Policyholders have concerns regarding rising premiums, but learning the underlying reasons can bring clarity.

Key takeaways

  • Insurance rates are increasing
  • Economic instability is partially to blame
  • Other factors include industry-specific trends, regulatory changes, and risk-assessment strategies
  • Policyholders should learn why rates are increasing to better handle the situation better

Insurance rates are rising nationwide. According to a Bankrate report, the average cost of full annual car insurance coverage is $2,543 nationally in 2024, up 26% from 2023.  The Wall Street Journal also reports home insurance premiums increased 21% between May 2022 and May 2023, with some states surging over 30%.

The rising cost of insurance stresses customers and causes confusion when they renew their plans and see what they owe. This confusion builds because many consumers don’t understand reasons for the rate hikes. 

Factors driving these increases include economic, environmental, political, and technological evolutions. Here’s a look at reasons insurance rate increases continue to surge.

Economic factors influencing rates

As you’ve probably noticed, inflation is raising prices on everything. You’re seeing the impact in grocery stores, at gas pumps, and, of course, in insurance offices. Why does inflation influence insurance premiums? Insurance companies face rising expenses because everything costs more, so policies carry more risk. Vehicles cost more, so replacing cars after accidents, as well as parts and labor, are more expensive. 

Inflation applies to more than cars. Home insurance impacts increases house prices, building materials, and labor. All these expenses pass to the consumer through higher premiums, which you’ll notice when you renew your policy. The good news is that inflation has slowed and should continue falling throughout 2024. There are other factors contributing to rising insurance costs worth investigating.

The role of disasters and technology

Insurance rates increase for different reasons in different industries. While auto and home insurance industries are dealing with inflation-related factors, other elements could influence price increases, too.

When it comes to home insurance, increases in the frequency and severity of natural disasters and significant weather events are straining insurers and creating price increases. In fact, the United Nations reports a five-fold increase in natural disaster frequency in the past 50 years, with the majority of the most expensive natural disasters occurring in the last 15 years. 

As intense storms, hurricanes, tornadoes, and wildfires become more common in certain parts of the country, home insurers must adjust their premiums to keep up with the risk. The result will be higher premiums for consumers in high-risk areas.

In the car insurance industry, firms leverage massive amounts of data to set premiums. The data companies collect is used in predictive analytics, enabling them to adjust customers’ risk profiles based on this information. By analyzing historical data and incorporating economic trends and environmental factors, insurers can anticipate and mitigate potential risks, influencing pricing decisions.

For instance, insurers may offer lower rates to drivers with safe driving habits, as proven by telematics data collected from devices installed in their vehicles. However, drivers with unsafe driving habits could see their premiums increase.

In short, your geographic area and personal habits could hike your insurance rate. These factors are worth looking into as you determine what’s going on with your policy.

Regulatory changes

Regulators typically implement insurance rules to protect consumers and stabilize the market. However, compliance costs, administrative burdens, and mandated coverage requirements contribute to higher premiums.

For example, the New York State Department of Financial Services (NYSDFS) recently issued a Proposed Insurance Circular Letter that could create further regulations over AI and external consumer data. While regulating and overseeing the use of this technology and customer information should be a positive for consumers because of its protections, it raises expenses for insurance companies that pass on to customers. 

This letter advises New York insurance companies to audit, document, and test AI systems, ensuring they offer fair pricing for all customers. Additional human oversight will be necessary if this Circular Letter becomes law, costs could increase for customers.

Changes in risk assessment

Insurance companies use multiple factors to assess risk, including demographics, health status, past claims, risk behaviors, and credit scores. Your coverage type can also influence your premiums. If your insurer sees you as a significant risk, your costs will likely increase. 

Advancing technology directs risk assessment. Every insurance agency has underwriting guidelines that standardize the process and create consistent pricing. Predictive modeling and AI allow insurers to more accurately assess risk, altering premiums for some policyholders. 

AI algorithms can introduce biases against specific demographics, though, and there’s a lack of transparency in how artificial intelligence arrives at its decisions. The NYSDFS Proposed Insurance Circular Letter aims to regulate AI use in the state, but there’s a long way to go before this technology fairly assesses everyone. As a result, AI usage could trigger premium increases for some policyholders.

How policyholders can manage these increases

There isn’t a singular reason for the rising cost of insurance — inflation, technology, climate change, risk assessment, and regulations are factors. It might seem like there’s very little consumers can do to combat rate increases, but shopping around and getting multiple quotes can help. Demanding transparency from insurers helps create fair pricing.

NICRIS Insurance offers personal, life, and commercial insurance in New York State. We’re committed to providing our customers with the best policies for them, helping keep costs down, and offering peace of mind. Contact NICRIS Insurance to get a quote