VIDEO: Understanding Insurance Costs, Changes

Insurance concept, man holding umbrella over a house | Image by KorArkaR/Shutterstock

To some, insurance policies are at best a mystery and at worst a massive headache — never mind trying to understand the rates and premiums.

In fairness, it is easy to get lost in the plethora of insurance policies that exist today, including those offering clients protection against kidnappings, alien abductions, and weddings being canceled due to cold feet.

Yet there are some kinds of coverage that many experts say everyone needs, including home insurance and auto insurance. As such, it is worth putting in the time to understand how insurance costs are calculated. The Texas Department of Insurance recently issued a bulletin explaining just that.

The first thing to understand is that the premium refers to the amount paid to an insurance company by a policyholder for coverage. Meanwhile, the rate is the cost of insurance per exposure unit.

While all rate adjustments should be reported to each state’s Department of Insurance, the degree to which they are regulated varies.

In Texas, the Department of Insurance analyzes rate filings to ensure that they are in accordance with state law. This means they must:

  • be adequate but not excessive
  • be founded on sound actuarial principles
  • be reasonable in relation to total costs
  • and not be discriminatory

Insurers can make rate changes as many times as they want, but they must explain them.

Once rates are set, insurers use their own formula for determining policyholders’ premiums. Insurance companies take an array of factors into consideration when calculating premiums. Many of these are specific to the policyholder.

For auto insurance, an insurer might adjust a person’s premium depending on:

  • the person’s driving record and claim history
  • where the person lives
  • the person’s driving habits
  • the person’s demographic information
  • the person’s occupation
  • the person’s credit score
  • and the cost of replacing the person’s vehicle.

When it comes to home insurance, the focus tends to be more on the dwelling itself. For instance, factors that might affect the premium include:

  • where the home is located
  • the age of the home
  • how old the roof is and its material
  • the cost of replacing the home
  • the policyholder’s claim history
  • and the policyholder’s credit score.

In both cases, any change to the abovementioned factors could result in a person’s premium going up or down.

Yet beyond these more personal risk factors, there are broader ones that might incur sweeping changes to insurance rates and premiums.

Texas, for instance, has had its fair share of natural disasters, from long-lasting heatwaves that fuel wildfires to winter storms capable of causing catastrophic blackouts.

In fact, as The Dallas Express recently reported, the volatile weather seen in the state over the last few years has taken a toll on Texas residents’ pocketbooks. Home insurance rates have increased by 50.9% since 2022, and experts predict that this trend is likely to continue in 2024.

These weather events and other heightened risks or costs — such as inflation — might prompt insurance companies to get their own insurance plan, as the Texas Department of Insurance explains. Although reinsurance helps insurers spread out risk and remain financially stable, the cost trickles down to the policyholder.

The bottom line, according to the agency, is that being a savvy customer is the best way to avoid paying more than necessary for insurance. Comparing rates and shopping around may be time-consuming but it pays off in the long run.

Consider using the HelpInsure tool, developed by the Texas Department of Insurance and the Office of Public Insurance Counsel, to easily get sample quotes and compare policies.

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