A clear guide to factors causing widespread fluctuations in premium rates.

Key takeaways:

  • Understand factors contributing to rising insurance costs
  • Gain insights into how costs impact individuals, families, and businesses
  • Learn about broad implications for the insurance market and financial stability

Mystified over the rising insurance premiums? You’re not alone. That’s why our earlier blog on understanding insurance rate increases is essential reading. It covers how things like natural disasters, personal data, and inflation play their parts.

It’s important to understand how these financial ripples affect customers and insurance companies. This makes it easier to manage your insurance risk profile and helps your position with policy providers.

Why insurance costs climb

Natural disasters and economic trends are two reasons for costlier insurance coverage. Climate change causes damaging floods and wildfires that impact vehicles and lead to insurance claims. Recent data showed the average cost of auto insurance has skyrocketed by 26% in 2024, and that isn’t just in disaster-prone areas, although they are hardest hit financially.

The same data lists population density as another factor making insurance more expensive. The ripple effects for auto insurance? More people means more vehicles on the road, creating more accident claims. Increasing human longevity creates longer driving lifetimes, increasing the likelihood for claims.

Economic trends also affect insurance coverage. A slow economy means businesses and customers have less money to spend. Less money means less disposable income for insurance and less revenue for insurers, making payouts and investments more challenging. When insurers can’t invest in the economy, it could negatively affect widespread financial stability.

Even if they can invest, sluggish economies can also mean less ROI, which may cause insurers to raise prices to compensate. Keep in mind 2024 represents the third year in a row for slow economic growth; that’s a long time for insurers to be financially challenge. This could make future rate hikes even more likely.

Impact on you and businesses

Higher rates affect budgets for households and companies. For example, the average annual auto-insurance premium in New York State is now $3,840. That’s 4.83% of average yearly income. 

How do company budgets suffer? Big or growing companies reap higher profits than small to medium-sized ones, and the bigger your operations, the more costly they are to insure. This is at the best of times; large companies will face significant premium increases in today’s climate.

Bigger businesses may be able to accommodate ongoing rate hikes. It’s harder for smaller ones, which may decide to forgo coverage. Should disaster strike, they won’t have the funds available to manage the financial hit, and could suffer crippling or closure-level losses.

The balance between managing costs and maintaining coverage can be tricky (and demoralizing) for businesses and individuals. The good news: it’s possible to take steps to improve insurance affordability. 

Effects within the insurance industry

Insurers may seem like the bad guys behind rising insurance costs, but it’s more nuanced than that. Natural disasters caused global losses of $250 billion in 2023. North America absorbed 40% of those losses. U.S. insurers had to pay out $67 billion, a huge loss for them. Raising premiums in the aftermath is one way to recoup those losses and gain a stronger financial position.

The cost of vehicles, medical care, and auto and home repairs are also constantly climbing. If the economy dictates premium increases to meet these expenses, insurers must do that to have more money on hand to meet those payouts. 

These price hikes aren’t great for customer relations for obvious reasons, but they’re also delicate for insurers because the insurance industry is fiercely competitive. Companies trying to survive will have to raise premiums, but in doing so they risk losing customers to other companies. Players must keep prices high enough to survive, meet payouts, and invest, but just low enough to remain competitive and attractive.

Broader economic effects

Stagnant markets can cause high business insurance rates, forcing companies to downsize or die. This means less investment, and employees with lower income or no job at all. These minimizations and losses all negatively impact the economy and leave insurers financially depleted and vulnerable to their own kinds of losses.

Auto insurance rates are also affected by people who don’t have any coverage. These people number in the tens of millions because wage growth isn’t keeping pace with premium increases, meaning next time you’re out on the road you may face an incident with an uninsured driver.

Uninsured Motorist (UM) insurance does exist if you want to protect yourself against that particular risk. However, it’s yet another added expense and a factor likely to continually drive up the cost of auto insurance. This greater expense could cause more people to decline auto insurance, creating more uninsured drivers and establishing an ongoing cycle of higher  premium increases.

Such a cycle feeds insurers losing income through fewer customers and having to raise prices. Lastly, rising insurance costs are potentially bad for public resources (those services or products which everyone in society has access to). Public resources require people to provide them, like emergency responders, electricians, and sanitation workers.

A 10% increase in health insurance premiums, for example, reduces employment odds by 1.6% and hours worked by 1%, forcing some full-time workers into part-time roles. That’s potentially less people in vital public positions, with those able to fill them becoming less available.

Knowledge is power

Understanding insurance coverage can seem complex, but education is a crucial step to better financial and insurance planning and positively influencing the variables you can control. Send us a message with any questions, or get an instant quote on home, renter, term life, motorcycle, or auto insurance!