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.
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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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