This week Sammy and I are going to finish up our discussion on how your claims history affects the premium you pay for your insurance policies. As you may recall, last week we discussed how the number of claims that you file can drive up your premium. This week, we are going to discuss how the severity (ie – total dollar value) of individual claims affects your premium.
Just a quick search on Google and you will find there is a lot of information out there about severe (major) insurance claims – the top causes of major homeowner’s claims, other blogs about major insurance claims, and even a website that lists the top 10 biggest insurance claims ever. When reviewing a large claim, especially in light of your future premiums, companies will generally consider a couple factors.
- Cause – I’ll make this as simple as possible. In the event of a large claim, the cause of the claim can be a factor that is considered with regard to premium change – although, this primarily applies to business insurance. Basically, if you have a large claim, but it’s not something that would be considered “your fault” (ie – a weather claim, an uninsured driver hits you),your agent can make an argument with the underwriter that this large claim was something outside of your control and not easily prevented. It’s not always successful, but it’s still worth having a discussion.
- Prior Claims – This ties into cause, in a way. If you have a large claim, but no prior claims, your agent can again make an argument that this was a one-time event that could happen to anyone, especially if you were not at fault. It’s definitely not always going to be successful, but it helps. However, if you have a couple prior claims, regardless of size, it makes it much more likely that you will see a premium increase (or potentially a non-renewal notice) upon expiration of your current term.
- Loss Ratio – Loss ratio is the calculation a company makes to determine your “net” expense to them. The most simple calculation takes the total dollar amount paid on every claim you’ve ever had while insured with that company (for THAT particular line of coverage – auto, home, etc), and divides it by the total amount of premium you’ve paid while insured with them (again, for THAT line of coverage). For example, let’s say you had a $1,000 claim and a $45,000 claim. You’ve been insured with the company for 25 years, and paid $23,000 of premium. Your loss ratio calculation would be $45,000 + $1,000 = $46,000, divided by $23,000. $46,000/$23,000 = 2, or 200%. Another example – the company paid out $8,000 in claims, and you’ve paid in $16,000 in premium. $8,000/$16,000 = .5, or 50%. Obviously, the higher your loss ratio is, the more likely it is your premium goes up. This is one argument for having longevity with a company – the longer you stay, the lower your loss ratio will be – and thus, the greater chance that a loss, even a large one, will not have a dramatic effect on your premium.
One last thought – claim history is something which “travels” with you. Similar to your driving record with the DMV or your credit score, ALL insurance companies provide claims information with a central database. When you change insurance companies, the new insurance company will contact the central database and have access to basic information about all of the prior claims that were filed.
In summary – two different factors are the biggest influence on how your claims history can affect your annual premium – frequency and severity. Obviously, the more that you do to reduce those two factors, the more favorable your insurance premiums will be! I’ll stress filing numerous small claims – the more small claims that you file, the less flexibility there will be in the pricing of your coverage.
A little dry these last two weeks, but I hope it helps you to understand how insurance works!