For example, if I get car insurance and get into an accident, why should that increase my premiums. I’m insuring against that risk, so the fact that I had an accident surely shouldn’t change by risk factors.
In: 7
The fact that you got in one accident implies greater risk of future accidents. It most definitely does change the risk factors.
To use a healthcare example: By far the biggest predictor of whether or not you’ll get hospitalized this year is whether or not you got hospitalized last year.
Insurance companies are in the risk assessment game, and one of the risk factors for future accidents is past accidents. People who have had accidents are statistically more likely to have more accidents in the future.
Maybe they’re bad drivers. Maybe they simply drive a lot or live in an area with particularly bad drivers.
The insurance company doesn’t much care *why* you keep crashing, they only care that you *do*.
Statistically people who get into accidents are more likely to get into future accidents. Thus one claim changes your risk factors and can be used to recalculate your premiums.
I don’t wish to defend the ethics of this practice. You can consider for yourself whether the above logic, or a deliberate strategy of disincentivising claims, is more important to the company.
It’s all statistics.
If you looked at all of the people in the US, the general statistical trend would say that being in a crash means you’re more likely to be in *more* crashes.
This makes intuitive sense. If you get in a crash, this would mean that (on average) your driving is riskier than someone that hasn’t been in a crash.
Now, is this exact? No. You could have gotten in a freak accident. But the insurance company doesn’t really know this. They don’t know how you drive, how generally safe you are, etc.
>For example, if I get car insurance and get into an accident, why should that increase my premiums.
* Because the insurance company now thinks the risk of you getting into an accident was higher than they previously thought.
* In order to make sure they still make money, they need to increase the amount they collect from you.
* Insurance companies are all about math.
* In order to make X % profits each year, they need to charge Y customers an average of $Z each month in premiums because their operating costs are $A and the amount they have to pay out in claims each month is $B and the way they predict $B is by intensely studying the causes of accidents and noting after decades of research that if a person has one accident over the course of 5 years, they are much more likely to have another accident over the next 5 years when compared to someone who had no accidents those first five years.
Insurance companies have a profit motive. Their profit directly from you is greatest when you pay for the service but don’t use the service. When you do use the service, the company’s profit declines slightly, but it can be recovered by charging you more in the future. Plus, if they promise to charge you enough extra in the future, it might discourage you from using the service unless absolutely necessary.
There is no existing and/or effective authority to prevent the company from doing this because we leveled up the free market perk to the max.
Gyms are another great example. They make more money when you don’t show up and exercise, causing wear and tear on their equipment, so scummier options take great pains to encourage you to sign up but discourage you from attending.
Insurance companies bank on most policy holders not filing any claims and as such earn a distinct profit. When you file a claim, your policy is less profitable. To mitigate future losses, now that you have shown yourself to be a greater risk of filing, they want you to pay more, to cover their profits should you file another claim.
Insurance companies want to attract a lot of low risk steady clients that will likely never need a big insurance payout and are just a steady stream of money. To do that they want to charge them a low rate. In order to facilitate that low rate they need to charge the higher risk people more. So if I need 1 million dollars to fund payouts and admin costs for 1000 clients 500 who are low risk and 500 high risk, I could charge $1000 each evenly or I could charge the high risk people each $1500 and the low risk people $500. In the first scenerio I’d get more high risk people wanting to use my plan as they save money but the low risk people wouldn’t like it. In the second scenerio I’d get more low risk people who want to save money and the high risk people, who frankly I don’t want to insure, basically are stuck paying the extra unless some other company actively courts them with low rates.
Depends on the circumstances on the claim.
If you park your car properly, get out and walk away… then someone else hits your car, your insurance will likely not increase. Ideally, the other driver’s insurance will be the one that pays out. But if they are uninsured or under-insured, your own insurance might fill in the difference (depending on your coverage) without increasing your premiums.
However, if you rear-ended someone because you weren’t paying attention… then you are a bad driver (in the eyes of your insurance company). Specifically, you’re a worse driver than you were before you got into that incident. The insurance premiums for someone who rear-ends others is higher than the premiums for someone who does not.
Insurance companies determine rates based on statistical risk. If you file a claim, they can predict that another one is statistically more likely than for someone who has not filed such a claim, and they’ll increase your premium to adjust for that increased probability of loss. It’s how insurance companies ensure their rates stay competitively low, but they still turn enough profit to keep operating (and keep investors happy).
1. It’s the [Law of Large Numbers](https://www.investprogram.org/students/insurance-in-real-life/law-of-large-numbers.aspx) in action.
>The law of large numbers states that as the number of policyholders increases, the more confident the insurance company is its prediction will prove true. Therefore, they attempt to acquire a large number of similar policyholders who all contribute to a fund which will pay the losses.
2) It’s important to note that it depends on the type of claim, too.
* If you have an at-fault accident (a Bodily Injury or Property Damage Liability claim), it suggests something about your driving habits. The insurance company can predict that there’s an increased probability that you’ll cost them more money in the future, so they raise your premium slightly to account for that probability.
* If you have a not-at-fault accident, such as someone hitting your parked car and driving off, that typically is NOT counted against you individually. The total number (*aggregate*) of such claims in a given geographic area often IS factored into risk calculations (for everyone in the area). Also, if you personally exceed a certain number of these types of “comprehensive” claims (like if you have 4 tows, a glass claim, and a hit-and-run in the space of a year), they might decline to renew your policy the next time it’s up for review (usually every 6 months).
Lastly, insurance (at least, Property & Casualty, like auto and homeowners) is *heavily* regulated. All of their rating plans, and any changes to them, have to be approved by the state Dept of Insurance, to make sure they’re fair (by the DOI’s definition) and in line with applicable state laws. They can’t just charge whatever-tf-they-want and call it good.
ETA: For something like P&C where a lot of the risk factors are within your control, and deductibles are reasonable, I think this is a good model. I think it’s a terrible model for healthcare. I think letting health insurance be run based on a profit-motive calculation leads to a massive “market failure” where the people who need healthcare most end up either bankrupt or lacking access, and there’s no way short of intervention for the market to self-correct, because all the market forces are pushing it away from something that actually works for the people who need it.
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