As an insurance broker, one of the most common questions I receive is “why have auto/home insurance rates gone up so much?”. This is a fair question especially that a majority of people asking are great drivers with great records.
Today’s blog post was inspired by a recent Reddit discussion I had with some fellow PFCers (Personal Finance Canada). A user went on the forum and simply asked “Has every car insurance company raised their rates?”. I just had to have my say. As always, the forum members were very appreciative of my answer.
So why have insurance rates gone up and seem to go up every year in Ontario?
My answer to this question will be based on my own experiences with clients, insurance companies and other insurance professionals. I will also only be talking about the general insurance landscape. Your own rate increases could be a combination of your personal rating factors and an increase in the base rates.
1. Fraud
Yes, I know you have heard this before, but its the truth. Sadly, it will continue being the reason for insurance increases for the foreseeable future.
There are two types of fraud: soft fraud and hard fraud.
Soft fraud are more of an exaggeration of what actually happened. Lets say your home burned down, and as you are listing your items to the insurance company, you mention that you had a 55″ flat screen TV when in reality, you had a 43″ TV. The claim still occurred but the client exaggerated the damages.
Hard fraud is 100% false in nature. An example would be a group of people plan a situation where a vehicle rear-ends them and they all claim accident benefits.
Both types of fraud are one of the main reasons your insurance has been increasing every year. In the Greater Toronto Areas, there are fraud rings who defraud the insurance companies regularly. Until fraud is put to a stop, insurance rates will continue to increase.
2. Low Interest Rates
Right now, we are in a time where interest rates are extremely low. This may be great for the homeowners who can save on their mortgage payments, but for cash heavy businesses such as insurance companies, it is not.
Insurance companies have two primary ways they make money: underwriting profits and interest.
An underwriting profit occurs when the insurance companies pay out less in claims then they received as premium. If a company pays out more in claims than they received in premiums, it is known as an underwriting loss. The last several years, most insurance companies have been operating at an underwriting loss.
The second way an insurance company makes money is through interest collected. Generally, the companies invest their money into safe investments that generate safe returns. Due to the extremely low interest rates, insurance companies were not able to offset their underwriting losses with good investment returns.
3. Claims Frequency + Repair Costs
Claim frequency and claim costs have been on the rise in Ontario, not just fraudulent claims. Since the GTA is welcoming a large amount of new residents every year, this puts more cars on our roads. With higher density comes more claims.
If you have a small fender bender on a 2016+ vehicle, the cost to repair that vehicle has become pricey. These new vehicles are equipped with expensive safety features, sensors, cameras and other fancy technology which in many cases requires special tools to repair. In one case, a small windshield claim costs upwards of $1,600 due to the display technology in the windshield. This was a Honda Accord.
This also applies to your home policies. Labor, materials and new by-laws make rebuilding homes much more expensive than a decade ago. With all the recent storms and natural disasters, it makes sense that insurance companies are increasing their rates.
My Prediction
2018-2020 have been the perfect storm for a major increase in insurance rates. With low interest rates, high claim frequency and repair cost and fraud, insurance premiums have no where to go but up.
I predict that we will see multiple increases in 2021 and for the next few years after that. The GTA is currently a very attractive place to move to so I do not see immigration slowing down post COVID.
Another note to keep in mind is that the insurance industry in Canada is currently in a “Hard Market”. Insurance companies not only are increasing their rates, but tightening their underwriting rules. I predict that we will be in a hard market for another 12-18 months.
Lets hope that I am wrong and we get out of this mess a lot sooner than that.
As always, stay safe everyone!
