A new brief from the Insurance Information Institute (Triple-I) explains the concept of risk-based pricing in insurance and addresses common misunderstandings about how insurance premiums are determined. Risk-based pricing means offering different prices for the same level of coverage based on specific risk factors related to the insured person or property. The brief notes that if policies were not priced this way, lower-risk drivers would have to subsidize higher-risk ones.
Confusion often arises when actuarially sound rating factors intersect with attributes that can appear discriminatory. The report points out that legislative involvement in insurance pricing is not a solution to rising premiums and may actually result in higher costs for consumers. “Simply put, it means offering different prices for the same level of coverage, based on risk factors specific to the insured person or property. If policies were not priced this way, lower-risk drivers would necessarily subsidize riskier ones,” states the brief.
Concerns have been raised over using credit-based insurance scores, geography, home ownership status, and motor vehicle records in setting premium rates for home and auto insurance. Insurers rely on teams of actuaries and data scientists to assess these variables while working to avoid unfair discrimination. According to Triple-I’s analysis, insurance-based credit scores are an effective predictor of collision claim frequency: “Drivers with the worst 10 percent of scores have twice as many collision claims as the best 10 percent.” The tools used by actuaries and underwriters aim to ensure fair and accurate pricing.
The report also highlights environmental changes as a factor influencing insurance pricing. Areas previously less affected by natural disasters such as wildfires and hurricanes are now experiencing more frequent costly events. Additionally, population growth in high-risk regions has increased exposure to these hazards. In some states where regulatory actions limit insurers’ ability to raise premiums in response to higher risks, companies have reduced their presence or withdrawn entirely from those markets. This has made homeowners’ coverage both less affordable and less available in those areas.
Inflation is another pressure on premiums; rising material and labor costs make repairs more expensive. If premiums do not reflect these increased costs, insurers could deplete their required reserves and face insolvency.
The brief suggests that governments can help address rising insurance costs by reducing risk through infrastructure investments focused on resilience. Policymakers are encouraged to collaborate with insurers and other stakeholders to incentivize homeowners’ investment in mitigation efforts—a strategy already showing positive results in certain state programs.
