The Insurance Information Institute (Triple-I) has released an Issues Brief that examines risk-based pricing in property and casualty insurance, addressing common misunderstandings and warning against government actions that could negatively impact consumers.
Risk-based pricing involves setting different insurance premiums for the same coverage based on the risk profile of each customer, vehicle, or property. This system enables insurers to offer lower premiums to policyholders with lower risk factors, while maintaining sufficient resources to pay claims for all customers.
“Without risk-based pricing, lower-risk consumers would end up subsidizing riskier ones,” said Sean Kevelighan, CEO of Triple-I. “That would force insurers to overcharge some customers and undercharge others, putting the companies’ financial stability – and their ability to pay claims – at risk.”
The Issues Brief acknowledges confusion when actuarially sound rating factors, such as credit-based insurance scores and location, are used to determine premiums. Critics sometimes view these factors as unfair. However, the brief cites data from the National Association of Insurance Commissioners showing that drivers with the lowest 10% of insurance scores file twice as many collision claims as those with the highest 10%. The use of these factors, according to Triple-I, allows for more accurate pricing and helps keep premiums fair and sustainable.
The report also discusses the impact of climate change and inflation on insurance pricing. Regions previously less prone to wildfires or hurricane-related flooding are now experiencing more frequent and costly disasters. Additionally, population growth in high-risk areas, along with rising material and labor costs, is contributing to higher premiums.
“Insurance pricing must reflect these increased risks to maintain policyholder surplus – the funds regulators require insurers to keep on hand to pay claims,” said Patrick Schmid, Ph.D., chief insurance officer at Triple-I. “Rising material and labor costs also drive premium increases. If rates don’t reflect these costs, insurers risk exhausting their policyholder surplus and potential insolvency.”
The Issues Brief suggests that collaboration among insurers, governments, and other stakeholders is needed to address affordability challenges. Recommendations include updating building codes, investing in resilient infrastructure, encouraging homeowners to adopt mitigation measures, and avoiding excessive regulation that could limit insurers’ ability to provide coverage.
“Strong building codes and proactive mitigation are critical to protecting communities and keeping insurance affordable,” Kevelighan said. “These measures help insurers remain financially strong so they can pay claims when disasters strike.”
The Insurance Information Institute, founded in 1960, provides data-driven insights on risk and insurance. It represents a membership responsible for nearly half of all U.S. property/casualty premiums written.
