How to Evaluate for a Rate Increase
By Melissa Stream, Underwriting Consultant
For many of our clients, the time is right to raise rates. Rate increases are a topic that should be discussed annually — keeping your rates current and being able to cover your claims is vital to your long-term success.
Reasons to Implement a Rate Increase
If you have not raised your rates in several years, they may not be adequate anymore. Think of the effects of a rate increase for the future, not just now. You may not see the full effect of a rate increase for a year or more. If your rate evaluation reveals that you need a large increase, you may need to take smaller, consistent rate increases for several years in a row.
You also would want to increase rates if you have not consistently had an underwriting profit. Underwriting profit is different from net profit. Underwriting profit is the net of premiums an insurer receives, minus losses paid out and administrative expenses over a given period. It does not include the gains made from invested premiums. Net profit is calculated by subtracting total expenses from total revenues. As an insurance company, underwriting profit is necessary to stay successful. If an insurance company pays more claims and consistently shows an underwriting loss, there is a real risk of that company not being able to pay future claims, or worse, becoming insolvent.
The rising costs of repair and reconstruction are another reason to raise rates. Construction and contractor costs will not decrease anytime soon. The United States has sustained substantial losses for several years, even prior to the Covid-19 pandemic, which also has affected construction and repair costs. We might be seeing the light at the end of the tunnel for the pandemic, but the combined effect of losses and shortages will continue to affect costs, and no one knows when or if we’ll see a stabilization or reduction.
How to Increase Rates
You may already know that your rates are inadequate, but not know how to raise them. Determining rate adequacy can be as simple as comparing several years of premium to the same years of paid losses, agent commission and expenses. This method ignores net reinsurance cost, unearned premium and estimates associated with losses payable, and investment and other income. However, it gives you a picture of very basic, direct underwriting results. The resulting ratio over a 10-year period with this method needs to be 65% or lower to allow for the factors not being considered. If not, your rates have been inadequate.
You may have recently increased your rates but are still writing more business than your company can handle. A company cannot control growth purely through rates. Consider tightening up your underwriting rules. This is the perfect opportunity to eliminate less-desirable risks and improve your overall book of business.
The most common reason we hear for resisting a rate increase is, “Our policyholders will not accept a rate increase.”
Companies that have taken a rate increase, even a large one, report very little surprise or resistance on the part of policyholders. Recent weather patterns have made people understand the need for insurance companies to raise their rates. Smaller, consistent raises may be tolerated more easily than large ones.
A deductible shift is another way to relatively raise rates without penalizing policyholders who do not have claims. Our research has shown that the standard base deductible is currently $1,000 among many insurance companies. If you’re thinking of a deductible shift, remember to examine the factors you’re applying to premiums for the different deductibles.
If you increase deductibles to a higher base deductible, eliminate the credit factor for that new base deductible and shift the factors for the next higher deductibles. Instead of surcharges for those insureds who want to keep lower deductibles, consider eliminating those lower deductibles.
If you are considering a rate increase and have questions, please contact us. We can help you figure out the course of action that is right for your mutual.