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The amount insurers pay out on home and car insurance claims has plummeted while the cost of your premiums have soared, according to a recent analysis by the Vanderbilt Policy Accelerator.
At a time when insurance companies are warning of the need for further rate hikes amid worsening climate change and the rising cost of home and auto repairs, this study says that they may already be charging most Americans far more than they need to remain solvent.
How did the study determine what portion of the premiums Americans pay was excessive? Where is all that extra money going if it’s not going to claims? Most importantly, what can you do to cut your home and auto premiums at a time when all of your other bills are going up as well? Here’s what you need to know.
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Study argues Americans are being overcharged for insurance
Rate setting in the insurance industry is a complex and not very transparent process. Every company has its own set of risk factors and its own methodology for rating that it’s reluctant to share with the public. Moreover, every state has its own set of rules around what insurers can and can’t use when setting those rates. Some states even require companies to submit rate proposals to the state insurance commissioner for approval before raising premiums at all.
With that complexity in mind, what exactly did this analysis measure, and how did it determine what portion of premiums constituted an overcharge?
The Vanderbilt study, which was obtained exclusively by the Associated Press, looks specifically at what’s called the loss ratio, or the gap between the amount insurers charge policyholders in premiums and the amount they pay out in claims every year.
For every dollar earned in premiums in 2024, the study says, companies paid out just 62 cents on claims on average. That’s down nearly 20 cents since the 1990s, when companies averaged about 80 cents per dollar in claim payouts.
If the loss ratio in 2024 had instead been at that 80 cent level from years prior, Americans would have saved a combined $150 billion in that year alone.
According to the study, that $150 billion per year is going toward “corporate perks, corporate jets, stock-buy backs, excessive executive compensation, excessive dividends, excessive advertising, and excessive agent commissions.”
Insurance companies argue that’s not the case. “Current loss ratios reflect the impact of enormous financial losses over the last several years and the steps insurers have taken (to) maintain and restore financial strength so funds are available to pay future claims,” Don Griffin, vice president for policy and research at the American Property Casualty Insurance Association, told AP in an email.
How can you combat soaring insurance premiums?
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The Vanderbilt study proposed a set of federal regulations to enforce a standard loss ratio for insurers nationwide in order to prevent excessive premiums. Right now, the insurance industry is regulated primarily at the state level, meaning the level of regulatory protections you enjoy depends almost entirely on which state you happen to live in.
Aside from waiting for those proposed federal regulations to become law or moving to a state with stronger consumer protection laws, what can you do to keep your insurance premiums under control at a time when loss ratios are apparently growing wider?
The most important step you can take is getting new quotes for your home and car insurance ahead of every renewal. Loyalty doesn’t pay in insurance anymore. Any loyalty discount you may be earning for sticking around is unlikely to outweigh the incentive pricing insurers offer to woo new customers.
In the worst-case scenario, shopping around for new quotes every year will just confirm that your current price is the best you’re going to find. In the best case, you could save hundreds every year for the exact same coverage.
Aside from switching your insurance every time you find a better deal, here are a few others effective strategies for lowering premiums without changing your coverage:
- Pay your policy in full up front rather than in monthly installments as many insurers offer a “paid in full” discount. This should work for both car and home insurance.
- Take a quick defensive driving course to save up to 10% on car insurance. Some states mandate discounts for taking defensive driving courses. But even if yours doesn’t, call your insurer to see if they offer the discount anyway.
- If you’re getting ready to buy a new car soon, check how much your favorite car models cost to insure first. Some models have far lower average premiums than others.
- Notify your insurer of any home safety upgrades you’ve made or plan to make, like installing a home security system or getting rid of a pool or trampoline.
- You may also be able to get discounts for home hardening upgrades and other projects that improve your home’s ability to withstand weather-related hazards.
- Look for membership-related discounts from places like AAA, AARP or even Costco.
- Ask your insurer about senior discounts for home insurance if you’re 55 or older.
Always scrutinize your insurance renewal quotes
Whether the soaring premiums are justified as insurance companies claim or excessive as the study suggests, the key takeaway for consumers is to always take a close look at that renewal offer. How is your insurer justifying those higher premiums? What discounts are they applying (or not applying)? Have any coverage terms changed?
Above all, remember that it doesn’t hurt to shop around just to see how that renewal offer compares to what other insurers are willing to charge. Even if you really like your current insurer, you can always use those quotes to try to negotiate a better rate.
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Alice J. Roden started working for Trending Insurance News at the end of 2021. Alice grew up in Salt Lake City, UT. A writer with a vast insurance industry background Alice has help with several of the biggest insurance companies. Before joining Trending Insurance News, Alice briefly worked as a freelance journalist for several radio stations. She covers home, renters and other property insurance stories.