Why do premiums rise on every renewal? What can I do about it?

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Reading Time: 3 minutes

Key Takeaways

  • Insurance premium amount is subject to increment with an increase in the risk factor.
  • Customers can reduce such eventual increases by maintaining a low claims history, a good driving record and by avoiding lapses in insurance coverage.
  • It is beneficial to adopt an insurance plan at a young age to attract lower premium rates.
  • The lifestyle and location of the individual also impact the premium amount.
  • Medical inflation results in an increase in the premium rates prevailing in the insurance industry.

Every day is filled with risks and one of the popular ways to protect your finances from such risks is by using insurance.  For the past few years, we have seen a steady rise in the amount of premium charged. Today, let’s take a deep dive into what can be the reasons for this.

While premiums often increase during renewal, it is important to understand what you can do to keep it in control and what are some causes that you cannot do anything about. Let’s get started.

Why do insurance premiums rise on renewal?

The base concept behind the governance of insurance plans is the risk factor. Higher the risk factor, higher will be the premium paid to the insurance companies for protection. The premium amount is calculated by actuaries after a thorough analysis and study of such risk. If the insurance company realises an increase in the risk associated with a customer, the premium amount may be increased subsequently. 

Controllable factors that can increase insurance premiums:

1. Claims History

Mathematically speaking,  a customer who has filed a claim once is likely to do so again (There are exceptions, such as claims made due to act of god incidents). Such a customer is categorised as risky. Insurance companies will increase the premium amount of a customer with a history of claims in the past 4-6 years. For example, a motor insurance company will increase the premium on motor insurance if the customer has made accident claims in the past.

To many individuals, this concept is discouraging and appears to defeat the whole purpose of having an insurance policy in the first place. However, the golden rule is to make a claim only when absolutely necessary, like in the case of a big loss, and to avoid making claims for minor losses. 

2. Lapse in insurance coverage

A lapse in insurance means that the individual has failed to pay the periodical premiums and the account value of the policy has exhausted as well. This automatically makes the individual a risk and therefore, upon renewal, insurance companies provide protection to such individuals only after increasing the premium rate.This isnt exactly an increase, it just means the individual loses the no claim bonus that has been accumulated so far, so no discounts are given on the new policy. It is often advised to renew or purchase an insurance policy as soon as possible after a lapse.

 

Uncontrollable factors that can increase insurance premiums:

 

1. Age

With increasing age, a person becomes more and more exposed to health issues and illnesses. When you apply for health or life insurance, the insurer will calculate your premium amount only after factoring in your age. People in their 20s or 30s will get a relatively lower premium than those in their 40s or above. Even though the misconception prevails that investing in an insurance plan at an early age is not necessary, we live in crucial times where unseen pandemics like Covid-19 are a high possibility. It is smart to take up an insurance plan when young so as to not be burdened with over the roof medical bills when an uncertain health emergency comes your way.

 

2. People in your pool

The amount of premium that you will have to pay also depends on your lifestyle choices. If you fall into a pool of individuals who are in risky occupations or an accident-prone lifestyle; then your premium amount will be set accordingly higher. For example, mountain climbers. However you can avail better rates through tie ups insurers may have  with your employer.

 

3. Natural disasters

Regions that are prone to natural disasters are potentially risky to the insurance companies. Subsequently, the premium rates for such regions are higher considering the threat level.

 

4. Inflation in healthcare cost

In health insurance,this factor is easily overlooked, the premium amount is most likely to increase in the wake of inflation in healthcare costs. Medical care costs rise year on year, and so will insurance premium. One way to safeguard yourself against this possibility is to get an insurance plan that already incorporates room for bearing medical inflation. Getting a plan early and renewing it without fail is also a good way to control premium costs.

 

Conclusion

In summation, the insurance premium amount is subject to change because of the changing circumstances of the customer as well as the insurance industry. The suggested care is to properly understand whether your insurance plan has space for bearing such changes. You should also look for the renewal benefits offered by the insurer to avail them.

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