Anuj Kasera
By Anuj Kasera
Today we will discuss a hot topic that is on everyone’s mind. I have people asking me, ‘Why is my insurance premium rising?’
First, we need to understand at high level what insurance is and how it works. Simply put, insurance works by spreading risk among many policyholders. The insurance company earns profit when payment of claims to few policyholders is less than the premiums collected from all the policyholders. Coming up with the optimum premium is an extremely challenging task for the insurance company because if they charge a high premium, then customers will switch to another company. Conversely, charging a low premium and claim payments will be more than the revenues, resulting in losses or bankruptcy.
Understandably, the premium algorithm is a complex, data-driven prediction model that calculates risks by analyzing factors like your claim history, location, and coverage, among other factors while layering in the macro trends like inflation, environmental and technological changes. In this article, we will try to understand the recent increase in insurance from the macro point of view.
Here are some key observations:
● In 2019, auto and home insurance increases correlated to increase in vehicle prices and construction materials respectively.
● In 2020, despite the increase in vehicle prices, premiums went down as driving was reduced due to Covid, resulting in fewer claims. Home insurance continued to follow construction material inflation, as expected.
● Vehicle prices continued to increase in 2021-22 due to restricted supply chain but auto insurance premiums did not increase due to Covid impact on driving. Premiums started going up only in 2023 post-Covid and continued their catch-up trend until 2025. This partially explains the large increases you may have seen in your auto insurance over the last catch-up years.
● Home premiums followed construction cost in 2019 and 2020. Despite the large increase in 2021 and 2022 construction costs, the premiums did not go up enough as there is often a lag between the two. The increases that you have seen in the last couple of years may be related to catch-up factors.
● But in 2025, the home insurance increases outpaced the construction cost increases. This can be explained by recent catastrophic losses. Remember insurance premiums are a function of not just costs but also frequency of claims. Hurricane losses have become more frequent and more severe. This may be reflected in higher property insurance premiums.
Again, this is just some data that I have put together to directionally explain the increases in insurance premiums. As seen above, majority of the increase that you have seen may not be under your control.
You can still take some steps to reduce the impact:
● Shop around: Talk to couple of agents to see if they can help with getting quotes from another company. It is very important to develop a relationship with your agent, who understands your needs and develops a trust bond.
● Review coverage: Remove unnecessary coverage and make sure that your policy reflects your current needs. I cannot emphasize enough the importance of having a trusting relationship with an agent who works for you.
● Bundle policies: Often companies will give you bigger discount if they insure both home and auto.
● Reduce risk: install security systems and smoke detectors.
Given the current macro situation, we do anticipate further pain. Rising cost of gas and pressure on supply chains will continue to result in higher inflation. Construction costs and vehicle prices are disproportionately impacted by inflation. While you consider your options, always understand the cost and risk of your decision and do a cost benefit analysis before you change your policy.
Disclaimer: The information in this article is for informational and educational purposes only. Views expressed here are solely my own and does not constitute professional advice.
Anuj Kasera is a long term resident of Charlotte, NC and owns an insurance agency, focusing mostly on home, auto and business insurance. He can be reached at anujkasera@gmail.com.
