Don’t panic, you can take steps to insulate yourself from these changes. But before we get into the solutions, let’s review a few reasons why we find ourselves in this situation.
Would you agree that a solid business plan, regardless of the type of business, would be to have more cash coming in vs. cash going out? Well unfortunately, the past few years, insurance companies haven’t collected enough premium (income) to offset the claims (expenses) they’ve had. Of course this isn't your fault, but you could certainly be affected and here’s why:
The Number 1 Reason Why Insurance Rates Are Going Up
Ever heard of your insurance company’s combined ratio? Unless you spend your free time doing research on your insurance company, chances are, your answer is a resounding “NO!” But I’m here to tell you, this ratio matters and you need to know why.
Insurance companies operate just like most other businesses, to earn a profit. Generally speaking, profit is the result of subtracting expenses from income. An insurance company earns income by selling various types of policies – home, auto, life and business insurance – to name a few. Its expenses are a combination of the claims they pay and the costs they incur to sell & service their policies.
Consider this example: insurance company sells a policy for a $100 premium. It costs roughly $30 for the insurance company to provide this policy. If the owner of this policy has a $70 claim, the insurance company’s profit is $0 on this policy. The combined ratio calculation is fairly simple: expenses + losses divided by premium or ($30 + $70) divided by $100 = 100%. Ok, so why should you care?
Any time an insurance company’s combined ratio is below 100%, they’re earning a profit. If insurance companies are earning a profit, they’re unlikely to increase their rates. In fact, they often times reduce their rates in an effort to gain more customers thereby increasing their profit. So what’s the problem?
In a recent report released by Insurance Journal, 2011 is projected to be the worst year for the insurance industry since 2006. The combined ratio for the entire industry is estimated to be 107%. Why will is impact you? Well if insurance companies have a tendency to reduce their rates when they make a profit, what do you think they’re going to do when they’re losing money?
With a 107% combined ratio, they have little choice but to increase rates. After all, at 107%, insurance companies are paying out $107 for every $100 they earn. How long can they, or any business, continue to operate at those numbers?
It’s not all bad though. We’ve been preparing for ramifications of this change for the past few months. In fact, we have a report titled 6 Steps to Prepare for Your Home Insurance Renewal which has been helping consumers and even other insurance agents all over the state of Ohio. Agent Matt Brown with Hayes Insurance Agencies in Ada, Ohio had this to say “This report is brilliant! I had five people request a copy the moment it was available.” If you haven’t requested your copy of this report, don’t delay. It’s free to all clients of H&H (a $97 value) so make sure you get your hands on your copy soon. Click here to request your copy.
Curious about what you can do to prevent 15 common homeowners insurance claims?
We want you to be prepared for the changes ahead, but most importantly, we want to make sure you have the protection you need and deserve in case catastrophe strikes.