Why Do Insurance Premiums Keep Going Up?

Before I answer this question, let me say that I hate the fact that insurance premiums are going up just as much as everyone else. As a Broker, it is my job to keep my clients happy and with insurance premiums rising, that makes my job very difficult and in the end, I lose clients because of it.

This year I’ve seen some companies raise their premiums as much as 15%. That means that when it comes time for renewal a policy that was $2000 last year is now renewing at $2300 this year assuming the driver has had no new tickets, accidents, or changed their car, the obvious question is “what the hell?!?!?”

Insurance companies are going into what is called a hard market. This simply means that they are losing money. You’re probably saying “that’s just not true, I pay $2300 per year and have never put a claim through, they must be making money”, and on the surface you would appear to be correct, however you are not the only client the insurance company has.

Insurance companies make money by investing money. They take premium earned and invest it, so when the markets are crashing and nobody’s investments are doing well, the same goes for the insurance companies. But that is not what causes a hard market; that just happens to be adding to the hard market right now.

The hard market is cause by the soft market. “What?”

During a soft market, insurance companies want to open the door and let in lots of business. Two tickets, no problem. At fault accident, that’s not a big deal. No previous insurance, come on in. Basically they are accepting as much new business as they can and the premiums are low, everyone is happy.

The problem with that is that with bad risks comes high claims payouts. I read somewhere that there are some companies in Ontario are currently paying $1.00 of accident benefits payouts for every $1.00 premium they are bringing in. I believe I read this through FSCO. That stat shows that insurance companies are only breaking even before any operating expenses. These are the companies that have been practically giving away insurance for the past five years and are now paying the price. So how do they stop this?

They close the door. You have two tickets, that’s a 300% surcharge. You have an at fault accident, high risk. No previous insurance, that’ll cost you. Insurance companies now want to clean up their book of business and start to realize that a smaller book of business with good clients is more profitable then a larger book of business with bad clients but the damage is now done and even the good clients have to pay the price.

The insurance industry has been searching for years for a happy median between a soft and hard market, but without success. I have been in insurance for five years now and this is the first hard market I have seen. The soft market seems to last 5-7 years and the hard market seems to last…….. I guess I’m about to find out.