Why Insurance Rates Increase?

Why Insurance Rates Increase?

Rate increases are necessary to maintain a company’s ability to pay out claims during the worst catastrophes. One of our Insurance Carriers, Tower Hill Insurance Group has created a great video explaining how and why insurance rates change. If you have any questions about your rates please contact us.


Below please find the transcript from the video featured in this article.

Hi, this is Joel Curran coming from the Tower Hill Insurance Group, LLC offices in Gainesville, Florida, where we have been serving the insurance needs of Floridians for 40 years. Our customers are loyal – every year, more than 95% accept our renewal offer. More than 100,000 have been with us for 5 years or more.

Unfortunately, everyone has to endure rate increases. But you still think: “why did you increase my premiums? I live in the same house and the market value has declined, there were no hurricanes, and I haven’t had any claims.”

The simple answer is that we need more premiums to cover our costs. But before I give more detail, let me tell you about Good Faith and Spread of Risk. Insurance is a Good Faith contract which means in part that you pay us, and we promise to pay you for damage or injuries covered by the contract. We take that promise seriously. We need to be financially strong enough to pay claims especially if there is a catastrophe. I’ll tell you more about that in a minute.

The second principle is Spread of Risk. Two hundred years ago when Ben Franklin started the first mutual fire insurance company, insurance meant that a small group chipped in equally, and if one house burned down there was money for rebuilding it. But if only ten people paid in and there were two house fires in a year, there would not be enough money to rebuild both homes. But the bigger the group, the broader the spread of risk, and pretty soon you get to a large enough number that the risk is low compared to the number of insurance buyers. That makes the overall risk more predictable. The more predictable – the lower everyone’s contributions will be.

Florida homeowners have a higher-than normal risk. Our 1,300-mile coastline is longer than any state except Alaska. The narrow shape of Florida means even non-coastal areas are very exposed. Our love of being near the water comes with a cost. To spread the risk and keep insurance accessible to everyone, we have to spread the cost as well.

So, what are those costs? Your premium goes towards three main cost areas: First, we make sure we can pay claims. We set aside surplus funds, as well as claims reserves, and we make conservative investments to fund them. We never take a risk with your premiums by putting them into risky investments.

Second, we cover the cost of operating the company, which provides jobs for more than 350 people in Florida. Through sales commissions we also support local independent insurance agencies in every Florida county. In addition, we have to make sure that if there is a hurricane, our facilities can keep running at full capacity so we can be there when you need us most.

Third – and this may surprise you – the biggest cost is reinsurance. Reinsurance is exactly what it sounds like – insurance for insurers, to make sure we can cover catastrophic losses. Reinsurance spreads risk globally, meaning that homeowners around the world are actually helping fund claim payments if a hurricane makes landfall in Florida – which happened in 2004 and 2005– when we paid out more than $2 billion to repair homes in Florida due to 8 hurricanes.

By the same token, Florida’s contributions help fund recoveries in other states and countries. When you watch the weather channel and see tornados in Kansas, or monsoons in China, know that premiums paid by insurance buyers all over the world, including us in Florida, will help repair the damages.

Reinsurers need to be prepared for the worst, and Tower Hill Insurance Group, LLC buys only from the best, most stable reinsurers who have demonstrated year over year that they can fund the losses they insure. The bottom line on reinsurance is that, no matter how well we run our company and manage our investments, if Tower Hill Insurance Group, LLC were on our own to fund years like 2004 and 2005 we would have to charge premiums that are a multiple of what we charge now.

So back to your question, “why is my premium increasing THIS year”? Well, in determining rate changes every year, Florida insurers have to balance the need for keeping insurance rates competitive with the need for keeping their businesses stable and for buying reinsurance.

Recently, two things have contributed. In 2011, even though Florida had a mild year, the world had its worst year on record for weather catastrophes. Because their risk is spread globally, reinsurers are increasing their rates to recover. That rate increase is hitting Florida just like everywhere else. In addition, while the value of homes everywhere has drastically dropped, the cost of repairing and rebuilding has not dropped. When we pay property damage claims we expect to pay contractors a fair price for their work, so we need to collect premium accordingly.

We don’t take rate increases lightly, and we know you don’t either. We go through extensive analysis to determine the fairest rates, and we file our rate changes with the Office of Insurance Regulation who is charged with making sure rates are adequate, not excessive, and do not unfairly discriminate.

Hopefully what I have said makes sense to you. I want you to know that everything we do at Tower Hill Insurance Group, LLC is done to ensure peace of mind for our individual and commercial policy holders. Forty years of experience means we know how to make the right decisions to protect your interests, so stick with us and we’ll ride out any future catastrophes together.