Why Are Everyone’s Insurance Rates Going Up?
⏰Fri, 06/07 11:51AM · 21mins
Transcript:
“Okay, today is Thursday, May 23rd, 2024. Most of you are current clients and know who I am, just in case people stumble into this video. My name is Joe Beck. I’m with Beck Insurance Agency in Archbold, Ohio and Whitehouse, Ohio.
I’m finding this video necessary due to the current market conditions for insurance. I was telling people that this is probably the hardest insurance market in 100 years when in fact, at this point, probably it’s the hardest market in the history of insurance for a variety of different reasons.
As a result, most of you have either gotten very large home and auto increases, or will be getting big home and auto increases pretty soon. I’m not a videographer and don’t know what I’m doing. So this is going to be unedited.
And just for the sake of trying to get to as many of you as I can, we I probably personally have 30 home and auto packages that have been looked at thoroughly, and remarketed sitting on my desk, ready to do a review on my end, and then reach out to clients.
I’m finding myself kind of having the same conversation, which is fine. This exact conversation quite a bit. And there’s such a huge volume that it’s taking away time to actually get the work done. And we’re getting further and further behind because this is literally affecting every single insurance policy that renews right now.
Before I explain kind of what’s going on, I’m going to briefly explain how an insurance company makes their money and how they how they set their rate and why that’s important so that it makes more sense in the end.
Most of your insurance companies, their goal is to break even as far as premium dollars go. For every dollar that you send an insurance company for a premium, approximately 30 cents about every dollar goes towards the cost of doing business.
Paying their employees, keeping the lights on, supplies, etc. Just the cost of doing business usually runs industry average is about 30%, okay. The other 70 cents on every dollar is usually going towards paying and settling claims, okay.
So between that, their goal for every dollar is to spend exactly 1.00 dollars. Okay. This is an inexact science, but it is a science. They have some pretty genius actuaries who are the ones who try to do predictive modeling and try to set rates based on what’s happened in the past.
This is going to be a pretty elementary breakdown for the sake of time. I don’t expect you to watch a 30 minute video, but this could bleed into that. Um, if an insurance company collects a dollar and for every dollar they spend 98 cents.
That insurance company made a profit of 2% on premium dollars. That’s called an underwriting profit. They are not going to be sad about that, but they will reduce their rates then to try to bring that back to spending exactly a dollar for every dollar that comes in.
The reason why they do that is because if they don’t, they will lose market share. They will no longer be competitive and you know, they’re going to lose business. So they want to be as competitive as they can.
And their sweet spot is that break even point on the other side. If say they spend a dollar five for every dollar that came in, then they had a 5% underwriting loss. Okay. And what you will then see as a result is they will raise rates by 5%.
That’s why you see rates fluctuating. It’s there, it’s an ever chasing of that break even point. Now this sounds crazy, but how do they make their money then? Okay. Most insurance companies make their money on what’s called the float.
The float is the investment returns on your premium dollars between when it comes in and when it goes out. It could be bonds, CDs, stocks, real estate or other investment tools. The returns off of those interest rate returns is where they make their profit.
But the goal is to take a dollar, spend a dollar, that is the goal. And the investment returns then get added to their surplus. Every insurance company out there is required by each state department of insurance that they operate in to have liquid, a certain amount of surplus relative to the amount of premiums that they write.
And all that means is they’ve got to have so much cash set aside, a certain percentage of how much business they’re doing in case of a catastrophe. I drew this, again very elementary. These are just random numbers, but let’s say that insurance company has a hundred million dollars in annual written premium and whatever state They’re in has a four to one ratio required That means that they have to have at minimum to be compliant not get put on probation not get kicked out of the state They have to have at least 25 million dollars liquid to comply with those state regulations if They’re running too high of a loss ratio.
That’s that dollar So if they were spending a dollar five for every dollar it comes in that’s a hundred and five percent combined loss ratio well In order to pay all those claims. They’ve got to pull the extra five percent out of that surplus in order to Keep doing business and that’s going to reduce their surplus if it falls below that that required limit They’re in trouble.
Insurance carriers could get placed on probation. They might have to pull out of a state they could go bankrupt a lot a lot of things so that is how That’s what happens to your premium dollars, and that’s how or why rates fluctuate the way that they do okay Specifically on home and auto we are seeing Over the last several years and even right now the insurance companies every insurance company from coast to coast in the United States is losing money hand over fist This is not sustainable.
In 2022 I believe the entire US property and casualty industry lost twenty six point five billion dollars.
In 2023 they lost thirty eight point five billion dollars.
As a result all these insurance companies have been scrambling to raise rates and despite a lot of these raising of rates some companies are kind of cooling off a little bit some still are just hemorrhaging money. 2004 so far isn’t fantastic either. If you turn on the news every single morning watch Good Morning America or whatever literally every morning you’re they’re talking about a rash of tornadoes or rash of hail storms or severe weather in the Midwest.
Usually when people think of severe weather they think of the West Coast or the Gulf you know which those are all problematic – but the Midwest contrary to most people’s understanding is as bad or or maybe even worse okay so Because of that, insurance companies, again, are taking massive rate increases.
Some are putting moratoriums on new business. They’re simply not writing new home and auto business in some states or across the board. Some insurance companies have gone bankrupt. Some have suspended lines of coverage, canceling every, you know, rental complex, or we’ve got one insurance company who’s literally canceling every home and auto policy in the state of Iowa of all places.
You would never think that Iowa would be a massive claims place, but it is just relentless the amount of wind and hail storms that are hitting Iowa and the amount of losses. And that particular company decided that there’s nothing that they can do in order to price the product right for the state of Iowa.
Sorry, this is a lot of information and I’m kind of going blank a little bit. So, you know, part of the home property rate increases are temporarily during COVID. The Canadian border was closed. So cost of building materials spiked quite a bit, as you remember, but we still have labor shortages.
We’ve got inflation.
A lot of those, you know, building materials are still higher than they were. On the auto side, COVID had a lot to do with this. And in fairness to the actuaries, how do you do predictive modeling on how a pandemic or, you know, whatever you want to call it, basically shutting everything down.
The computer chip, microchip shortage has caused a massive shortage. of manufacturing used cars. There’s a car shortage. The cost of parts is extremely high. The cost of shipping is high. Today if you crash your car, if you total your car today, the cost to settle that claim, it was, I don’t know if it still is, but it’s probably not far off of it.
It’s at least 50 to 60 percent more than what it was before COVID. Okay, so blue book values of cars are exponentially higher than they were before. The cost of fixed cars is through the roof. We’ve got increasing distracted driving cell phones for whatever reason, after everybody realizes that they weren’t gonna die and things open back up.
People started driving like lunatics.
I don’t know why but if you check the federal statistics you will see that clearly the amount of speeding, reckless driving, driving under the influence, all those items are up, I don’t remember, between 15 and 20 percent across the board.
So all that is contributing to the huge spike in claims, the huge spike in losses and you know they’re like any other business. They can’t, they can only lose money for so long. All these insurance companies have to go between credit rating agencies and they get financially graded every single year.
Those credit ratings are insanely important so they’ve got to keep their books healthy otherwise they will get downgraded. A downgrade on a certain company doing a certain thing could be a death sentence for an insurance company.
For example if you insure a bunch of contractors and you get downgraded from an A to a B and you go to bid a bunch of jobs and you have to supply a certificate of insurance. A lot of the attorneys for these other contractors that are hiring subcontractors you have to be insured with an A -rated company and if you’re not your certificate is not acceptable and you won’t get that work.
So you either work for subpar contractors or you close the doors or you find a new insurance company and that’s what’s happening. So these are critical and a ton of insurance companies are getting financially downgraded.
One you won’t hear about it It is a big, big name, and they got a downgrade on their homeowner line. Now is not the place to call them out, but it’s definitely happening. So as a result, what our agency is doing is we are reviewing literally every single renewal that comes in the door, and then we’re doing a complete full remarket.
In some cases, we’re able to find things to fix. In some cases, we’re finding that, let’s move you from this company to this company. So we’re scrambling, we’re doing everything we can. I think last I checked, we had like 7 ,000 policies enforced right now.
Obviously, not all those are home and auto policies, but a big chunk of those are. You know, we’ve got we’re all hands on deck and we have a ton of people reviewing these daily and remarketing them and Ultimately, they’re going to the original producing agent and we’re reaching out and all that stuff When I reach out to people with our findings I’m offering to Do a full review which you know, that’s gonna entail reviewing your current coverages different things we can do But a big bulk of that is having this exact conversation to explain what’s going on why?
And where this is going We can still have that talk but I’m kind of sending this out so I can reach as many of you as I can because I want everybody to Know and understand what’s going on that we are looking at it.
We kind of are on the ball but if I can save some time kind of sending out this video That’s just more time than I’m gonna have available to work on those renewals And look for solutions and try to figure out some some other stuff I was just in a meeting About six hours away with 90 Fantastic agents and every conversation was the same there.
This is everywhere.
I was thinking that the market would start softening up in the middle of 2024. I’m getting less and less optimistic that that’s gonna happen. Most of the company people I have talked to are thinking it’s gonna be in 2025 sometime. I Don’t know what the weather trends are gonna do but there’s a lot of action being taken not only in rate side but deductibles on property and roofing coverage.
I’m sure I am forgetting a whole bunch of stuff but if you have any questions please please please let us know you can always contact me directly Our staff is doing an incredible job they are vetting my calls so if you call you know they’re gonna ask if they can help you – give them a swing.
Everybody in our building is a licensed agent and they are trying to keep me freed up to keep rolling on these and looking for solutions and you know trying to provide the best service we can if you have to talk to me just say listen I have to talk to Joe or Kylie or Lori or whomever I think we’re gonna get through it.
We got to get through it and have the insurance industry intact. The U .S. economy can’t function without it. We’re, we’ve already lost some companies by we, the U .S. industry. We’ll probably lose some more companies, but so far all of our companies have made the appropriate action.
It’s not always fun. They’ve had to make some difficult choices, but they’ve all had to do it and as a result all of them are, you know, gonna make it. All of them have retained their A ratings with the credit agencies.
A ratings are better and I think we’ll get through it, but just wanted to communicate exactly what’s going on, why, how a lot of this stuff is determined, you know, we’re kind of, insurance rates, what some of you may ask or what I’ve been asked before is why is this happening now when COVID was in 2020 and I don’t even remember when things opened up.
Most insurance financial losses or results for that matter run 18 to 24 months after what’s happening today. It’s a, it takes time to cycle through for, for the bottom line results to be realized with an insurance company.
So, you know, we’re kind of, we’re, we’re kind of in a, the industry’s kind of in a COVID hangover indirectly from, you know, what all went down. So if you got any questions, feel free to reach out either office.
You can get us by 419 -446. 2777. This is a very, very basic, I could have turned this into a four hour video, maybe not four but, you know, say well that’s not exactly true or we had cost of reinsurance and stuff like that.
I’m trying to make this simple and keep this a tight and concise, you know, get to the point video. So I’ve already rambled on for 20 minutes. Thank you all. We truly, truly appreciate all of you, all of you that have been waiting on me or waiting on somebody.
Really appreciate your patience and your loyalty. We are working on it. We are getting to it. It’s just a lot to get through. So thank you and have an awesome day. All right. Bye.”
Joseph D. Beck, CIC, CPRM, President / Beck Insurance Agency, Inc.
