Sep 24, 2009
Why did my *&)(*&)(* rate go up?????:
We are entering a period of increasing Insurance rates across all types of coverage and for virtually every Insurance Company in the province of Ontario. The biggest frustration for most people is that they are not given a proper explanation as to why this is happening. I will try my best to explain the factors that lead to this type of environment, but if you'd like to discuss it with us further, we'd welcome your input.
Some of the factors that are leading us into this difficult marketplace are:
- Declining investment income for Insurance Companies, both due to historically low interest rates (the majority of their portfolios, by law, must be in 'blue chip' bonds, government bonds and other guaranteed investments) and, as we all experienced in the fall of 2008, a drastic correction of the stock market.
- Increasing frequency and severity of claims. This is true for auto (just look at the way people drive) and property (100 year storms are happening virtually every summer - the storm of August 19, 2005 alone caused approximately $500 million in insured damages.)
- Intense competition keeping prices artificially low.
- Uninsured motorists, who are not putting their fair share into the 'pool of funds.' For example, if total premiums collected from all insured drivers in the province are $2 billion dollars, and claims are $1.8 billion dollars in a year, the industry would be running a 90% 'loss ratio' (claims paid versus premiums collected), which means that after paying expenses for staff, commissions/sales salaries, office space, advertising etc, they would be losing money on every policy they sell. The key is the participation rate - by that I mean the number of people who pay their insurance versus the number of people who take the risk and go without. If that rate is 70%, that means that the $2 billion collected in premiums would actually be closer to $2.85 billion if everyone paid their fair share. This would bring that 'loss ratio' down to about 63% and would actually allow for LOWER premiums.
My personal opinion is that #4 is actually the biggest problem we face as an industry and as society as a whole.
The industry is working with government to adjust the auto policy in an attempt to make it more affordable, and in time a better system will be implimented to enforce the legal requirement to carry insurance on a vehicle. I remain optimistic that these problems will be addressed in the long run, but over the short term, to maintain capital requirements, all companies will be forced to raise their rates.
We monitor rates for all our clients and from time to time will recommend a change of companies if there is a severe dislocation in their rate, but in general, due to the application of 'loyalty discounts' it's usually better not to change companies too often.
This is a follow up to my previous comments about Online Quoting and rates (January '08). read this
I hope you find this helpful and I would be glad to answer any questions you may have.
Michael Stuart, BBA, FCIP, CRM, CAIB
Grant, Jones & Stuart Insurance Brokers
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