If your Auto policy just renewed and your price has gone up, you are not alone. We are noticing a trend in Minnesota of rising Auto insurance rates, similar to what drivers have been experiencing across the country in the last two years, according to many news sources. (Here’s one example story by CBS.)
The good news for drivers is that we do have a competitive Auto insurance marketplace. There are many, many different insurance carriers who would like your business and are looking for ways to win you as a customer. If one carrier decides to raise prices simply to rake in more profits, someone else will undercut their rates and steal much of their client base.
Having said that, an insurance carrier can’t sell you insurance coverage at a loss, or at least they can’t do so for long. When rates are adjusted across the board there is typically an underlying cause.
So why have Auto insurance rates been going up around the country? According to everything I have read, it comes down to two primary factors. Drivers are getting into more accidents, and each accident is costing insurance companies more.
Let’s break this down. It’s been said that more accidents are happening because people have been driving more miles due to lower gas prices. In addition, increased distractions such as texting while driving continues to cause more accidents. And accidents are growing more expensive to cover for several reasons, including the cost to replace all the new safety devices going into new vehicles, ever-increasing medical costs and increased litigation costs and average claim settlements. (Read more about the reasons for higher rates here.)
“But why are MY auto insurance rates going up?” you may ask. “I haven’t filed any claims.” Let me see if I can explain this with a simple example.
Example of how Auto insurance rates work
Let’s pretend Lake Mutual is an insurance company who insures ten drivers and ten vehicles. For the past several years, Lake Mutual has paid $7000 per year in claims and their overhead costs have averaged $2600 per year. They have collected a total of $10,000 in premium per year from their ten drivers and have made $400 per year in profit.
Now, one might assume that if Lake Mutual is collecting $10,000 in premium per year from their ten drivers, then each driver is paying $1000 per year. But that’s not how Auto insurance works. Instead, what Lake Mutual does is to look at statistical likelihood of each driver to file a future claim.
Lake Mutual charges Jared the most. He is 22 and has had a DUI and two speeding tickets in recent years. Lake Mutual charges Jared a whopping $3000 a year. They also charge Sandra $1400 a year. She is 45 but had two recent accidents with her prior carrier before switching to Lake Mutual.
Lake Mutual considers both Jared and Sandra to be a lot riskier than their other drivers and so charges them way more. This takes care of nearly half of the $10,000 Lake Mutual needs to collect, and so it splits the remaining $5600 among their remaining eight drivers, at an average of $700 per driver per year.
Glen pays the least. He is 55 and has a perfect driving record other low-risk factors and pays only $450 per year.
To recap, Lake Mutual has been charging its ten drivers a total of $10,000 a year, from Jared at $3000 down to Glen at $450. Unfortunately, costs are going up. Lake Mutual’s claim payments last year went up to $7900 and their overhead to $2800. So they have decided that they will have to raise rates to collect $11,000 this next year instead of $10,000. This means each driver gets a ten percent increase. Jared’s rates go up from $3000 to $3300. Glen’s rates go up from $450 to $495.
Of course, Glen isn’t happy about his increase. He has been paying Lake Mutual $450 a year for several years and hasn’t filed any claims. He doesn’t feel his rates should go up because of other people’s claims. What he doesn’t know is that he is still paying way less than some of Lake Mutual’s other insured drivers, because he is a lower risk. All Glen sees is his $45 increase.
What this very simplified example points out is that a low risk driver will always pay less than a higher risk driver, but when costs go up, everyone will pay more. Unfortunately, this is the nature of Auto insurance.
What to do about rising Auto insurance rates
If you are seeing your rates go up, there are several things you can do about it:
Ken Cobb is owner of Pine Country Insurance and has been active in the insurance industry for over 15 years. Meet Ken.
Coverage descriptions found in this blog are summaries provided for general educational purposes and cannot fully detail the terms, conditions, limitations or exclusions of a specific insurance policy. Please read your policy carefully.