Have you ever heard the phrase, “What have you done for me lately?” You may feel this way many times when dealing with your insurance company after having a claim. You may have had the same insurer for years or even decades and have never asked them for a penny. Then, after all that time, something happens, and you have a claim. The insurance company pays the claim, and then, when your policy renewal comes, you notice something you may not have been expecting — your premium has increased because of that claim. After all those years without a claim, how and why does this happen?
To explain — not justify — this scenario, a little Insurance 101 may be necessary, so let’s start there. You can also watch my video about this:
Let’s compare the insurance process with your job and your relationship with your employer. You have a job, most likely, and at some point, you had to interview for that position at that company. You sent in your résumé and were called in to interview, and then, based on your qualifications, you were hired for that job. Congratulations! You made an agreement with your employer for your salary and started working.
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This is similar to how you found, applied for and purchased your insurance policy. You filled out an application, much like providing your résumé to a prospective employer. In your application, you provided information about yourself and what you wanted to get insured. For the sake of discussion, let’s say you were insuring your car. Your auto insurance application was a snapshot of you and your car, just like your résumé to your employer was a snapshot of you and your experience at that period of time.
The insurance company reviewed your application and decided yes, they would take this risk, they would insure you and your car. They offered you a price you would pay, much like your employer offered you a salary, and you agreed. You agreed to pay the premium offered in exchange for the insurance policy and coverage you received. Again, just like you accepted the terms of your employment, including your salary, based on your job qualifications.
Now it’s time for a salary adjustment
Some time passes at your job. How about a year? Sure, a year is a nice round number. A year goes by, and you say to yourself, “Hey, self, I think I am worth more to my employer than I was a year ago. I am going to ask for a raise.” So you make an appointment with your employer’s appropriate person, follow the proper channels and sit down to discuss a raise. Your employer reviews your current job duties, checks how you’ve done over the last year and how they think you can potentially perform in the future. You’ve done solid work, been a team player, didn’t cause drama, and they see potential in you and agree to increase your salary. Well done!
On the insurance side, a year has gone by since you purchased your auto insurance policy. The policy is coming up for renewal, and the insurance company goes through the exact same process. You tell them that you would like to continue your insurance policy. They check your driving record over the last year to see if you’ve been a safe driver, not picked up any moving violations or caused any car accidents. Looks good, so they agree to renew your insurance policy. The cost of labor has increased a bit, so instead of offering you the identical price as last time, they say they need to increase the premium 2%, but all other terms can remain the same. You have a decision to make, just like you did when your employer made you an offer for a salary increase — do you accept it, or do you decline it? In this case, you accept it.
Karl is an insurance agency owner, insurance expert witness in state, federal and criminal courts, and radio talk show host. For more than 30 years, Karl has helped consumers understand the complex world of insurance. He provides actionable advice and distills complex insurance concepts into understandable options. He appears regularly in the media, offering commentary and analysis of insurance industry news, and advises lawmakers on legislation, programs and policies.
Now let’s jump forward 10 years. Every year, there has been this similar type of communication between you and your employer for your job, and you and your insurance company for your auto insurance. However, this past year, you made a major mistake on one of your employer’s largest clients, costing the employer a lot of money. You also exchanged some relatively heated words with a co-worker, and Human Resources had to get involved to diffuse things.
Time for your annual review at work. You once again sit down with your Human Resources rep and have your chat. They point out to you that your mistake with the large client was extremely costly to the company. They also point out that they are a bit concerned with your recent interaction with another employee. Are you still expecting your employer to give you a salary increase?
Chances are, that’s not within your expectations. You may even be concerned about getting fired. Yes, you’ve been a good 10-year employee, and you’ve been compensated as such. But you’re looking quite different to your employer today. You are not the same employee they hired and kept on board for 10 years. You’re an employee who made a serious mistake and also had some difficulties with a fellow employee. Your company agrees to keep you employed. However, you’re getting no raise, and you are told that if you step out of line again, you may not have a job.
How this applies to your auto insurance
Your auto insurance is coming up for renewal. A few months ago, you had a small fender bender. Not a big deal, nobody was hurt, just some damage to your car and to the car of the person you rear-ended. Also, you were really upset after fighting with your significant other and got caught doing 80 in a 55 mph zone and now have a speeding ticket to pay. Your auto insurer looks at the new you. This is you today, not you 10 years ago. This new you is a driver with an accident and a speeding ticket on your driving record. Do you think you should be paying the same price as someone who didn’t have an accident or a speeding ticket last year?
I get it — but … but … but … but … but yes. You are a different risk than you were 10 years ago, or even two years ago. Just like another person who walks in the door for the first time with a ticket and an accident on their record, you will pay a higher rate than you did 10 years ago when you had never bumped another car or broken a traffic law.
Insurance companies, like employers in this example, have to make decisions about the you you are today, not the you you were before. It is frustrating, and hopefully now you have a better idea of the why. Remember, you are the person who had the accident and broke the law by speeding, and your rate will now reflect that.
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