Why am I paying more for my auto rates?

Why am I paying more for my auto rates?


Even when there are no injuries, car accidents could be financially devastating without insurance. Vehicle insurance is designed to make sure that owners do not have to come completely out of pocket for all of these expenses. However, changes in the broader economy can impact car insurance rates in ways that are beyond the control of both insurance providers are policyholders. Insurance providers use what’s known as an auto loss ratio to determine rates, with that ratio impacted significantly by various external factors.

How Is an Auto Loss Ratio Calculated?


An auto-loss ratio is a calculation that insurance providers use to determine whether offering insurance products is profitable. Insurance providers will regularly assess the cost of offering insurance to customers at an industry level as well as an individual level to determine if the costs are too high considering the associated risks. 


At a high level, the formula for determining an auto-loss ratio is relatively simple:


Auto Loss Ratio = (Total Auto Claims Paid) / (Total Auto Premiums Earned)


For example, if the Total Auto Claims Paid  = $100,000 and the Total Auto Premiums Earned = $200,000, the auto loss ratio is .5, or 50%. So for every $1 in premiums paid, the insurance company would pay out 50 cents. 


Each insurance company maintains a different ratio. But as a consumer, if you see prices increasing, it’s likely because your insurance provider is making adjustments to ensure it can continue to afford offering insurance products. 

Increasing Claim Costs Result in Higher Insurance Rates


To maintain that profitable auto loss ratio, insurance companies at times need to raise premiums. Typically, this will happen when the total cost of auto claims paid begins to rise. There are several market conditions that will cause auto insurance claims to rise. These can include, but are not limited to:


    • Labor costs increase
  • The cost of parts increases due to limited supply
  • A rise in the number of claims being processed


All of these are currently happening in the market. For example, in 2022, a TikTok challenge that showed the ease of stealing certain Kia and Hyundai models caused a dramatic increase in the number of claims being processed for these types of vehicles. Many auto insurance providers decided to stop writing new policies for affected vehicles because the auto loss ratio was too low to sustain profitability for those types of vehicles. 


More broadly, labor costs are up and supply chain issues are impacting service providers across the US and abroad. This has caused the cost of claims to rise for all providers. 


Positively, the rise in insurance rates is not just you; everyone’s impacted. But if you believe you have a lower risk to insurance providers, you may be able to get lower rates by shopping around. Give us a call at 650-873-1255 and we’ll be happy to answer any questions you have about your auto risk and rates.