Insurance rates depend on several factors, including Loss Ratio (LR), which measures the relationship between premiums collected and claims paid.
How Insurance Rates Are Calculated
Insurance carriers determine annual rate changes based on a key metric called Loss Ratio (LR). LR compares the premiums collected with claims paid during a given year, whether fiscal or calendar. Here’s why LR matters:
- LR Below 100: Rates are likely to stay the same or decrease.
- LR Above 100: Rates increase, as seen in 2021 due to skyrocketing home and auto repair costs after COVID-19. For example, LR reached an estimated 160, causing steep insurance premium hikes.
Factors Influencing Insurance Premiums
- State LR Variations: Rates primarily depend on state-specific LRs, with exceptions for local variations.
- Zip Code Differences: Urban areas like Milwaukee have distinct rates for each zip code, while smaller regions like Kenosha may see uniform rates across zip codes.
- Cost of Living: Rising living costs impact insurance employee salaries, contributing to rate adjustments.
Role of Reinsurance When major disasters like California’s wildfires (2024-2025) overwhelm claims, insurers rely on reinsurance carriers (e.g., Lloyds of London). These companies help cover costs, spreading additional premiums across states. While this adds expense, the increase is smaller than surcharges for common claims like an isolated fire or windstorm damage.