You're Crazy If You Think Your Insurance Will Get Cheaper...

That’s right, I said it. Let me clarify. All things being equal, you driving the same car, living in the same house, never getting a ticket or having a claim, your final premium will increase more often than it will decrease.

The obvious question is why? Most people believe that their rates should go down annually if they don’t have any claims. This is a somewhat flawed way to think, after all, if you have no claims and you get a discount every year, eventually, you’ll be paying close to nothing. In order to understand what’s going on with your premiums, we must understand how premiums are calculated from an insurance company’s perspective. Insurance is a funny thing, in that the insurance company has to decide what it will charge before they know what their costs will be. Imagine if a restaurant operated that way…

In order to fulfill it’s promise to pay the claims of it’s clients, the insurance company must have enough money on hand. They must also be able to cover their own expenses and be able to make a profit. The premium charged takes into account what is needed to pay current and ongoing claims. An insurer will forecast trends in costs, and will apply those factors to this year’s claims in an effort to more accurately predict what next years claims will cost. The insurer must also take into account their expenses related to acquiring the business, this could take shape in the form of commissions to brokers and agents, advertising and promotional costs, or a combination of sorts. The insurer also has to cover it’s own administrative expenses such as rents and salaries. Finally, after all of these items have been paid, the end result has to be a profit.

Each year, all of the costs mentioned are escalating, claims are more expensive to settle, employees earn more, medical costs and car parts are more as well. Just as your life is more expensive to live this year than it was 5 years ago, so too is the cost of running a company. So much like a prudent person plans for their cable and gas bills to rise next year, I would suggest you plan for an increase in your insurance premiums, somewhere in the neighbourhood of an average of 3-5%.