Why should a person buy insurance if they can’t turn in claims? And why should my claims affect my annual premium? Isn’t that why a person buys insurance? This is a great question but the answer is more of a technical answer than a person would think.
Of course people buy insurance to protect themselves against claims. But what type and size of claims? A good rule of thumb is to pick as high a deductible that can be reasonably afforded and of course get as much credit for that deductible as possible. But also a rule of thumb would be not to turn in small claims. These claims should be handled internally almost like maintenance costs.
Insurance companies attempt to make money two different ways. The first is what they consider their underwriting profit. This is simply their annual premium less payments for claims. Approximately 25-35% of the premium is set aside to pay for the operations of the insurance business leaving approximately 65-75% of the premium for claims. Anytime a 4-5 year experience results in claims above 65-75% of the premium, a carrier will start to make changes to the premium. This usually does not include the 1 time large claim which may be considered more of a shock loss that may not happen again, such as a large fire. Multiple claims during this period actually cause more change in the underwriting and the pricing of premium.
In personal lines, most carriers are actually reviewing the number of incidents vs. the actual amount of the claims. Carriers always review their books of business and either change their premiums at renewal or change their guidelines in an attempt to reward lower claims activity. We see more premium increases with larger regional claims activity such as a hail storm.
The second way carriers attempt to make money is investing the premium while they have it. This does not directly affect a specific customer but there are changes in annual on a macro basis whenever there are large swings in the economy. Two that come to mind are the mid 80’s when interest rates dropped from sky-high to more reasonable rates. This lowers results from money market funds. The second was after 9-11 which caused major economic instability in the overall markets.
Please contact Ramey King if we can assist in evaluating your insurance situation or be of any assistance with business, real estate, personal lines or health insurance issues.
