Why do premiums always increase?

Posted by: Conor Sligo on 26 May 2007

Some insurance premiums increase slowly but surely as you age - life insurance for example. Other insurance, like car insurance, decreases in price the older you get. And some insurance, like health or income protection, can have more sudden premium increases.

This article takes a look at 2 reasons why these premium increases can happen – and what a premium increase really means for you.

Number 1:

The insurance company is paying more in claims. Insurance companies charge premiums based on their claims history and the expected level of claims in the future. If the company has more claims than it expected it has a couple of options: It could increase premiums to reflect the actual number of claims it’s had. Or, the insurer could aim to keep premiums at the same level by cutting its costs. There’s an easy way for an insurer do this – by simply paying fewer claims or by increasing restrictions on claims paid. From the perspective of the client this is the worst possible option. A premium increase is never welcome; but when you need to make a claim, you want the insurance company to assess your claim quickly and fairly. If an insurer’s premiums haven’t kept pace with the actual claims it’s paid, the insurer will have to cut costs somewhere – and an insurer desperate to cut costs is not what you want when you need to make a claim.

Number 2:

Healthcare is getting better - modern medical procedures are becoming more advanced and less invasive. If you require treatment, this is good news for you – it means that the procedure you have is very likely to be much less invasive than it would have been 10 or even 5 years ago. The procedure is likely to have a greater chance of curing you – and the less invasive a procedure is the less time you’re going to need to recuperate. This means that you can get back to life more quickly. However as healthcare gets more advanced it gets more expensive. A couple of quick examples: between 2000 and 2004 the average cost of heart procedures increased by 62%*. Over the same period the cost of urological procedures increased by 121%*. This increase in cost will drive up insurance premiums. But remember - as health care costs rise insurance becomes more important – if you don’t have insurance the cost of private health care could cripple you financially.

There are other factors too – for example the cost of labour in the health sector continues to increase. This increase in cost will have a direct affect on your insurance premiums.

An increase in premiums can sting. But keep in mind that the reasons that your insurance premium has increased makes your cover all the more important. It means that more people are claiming and costs are rising. Without insurance you could be footing the bill, which could leave you or the people you care about in financial hot water. Also, a premium increase is often done to ensure the insurer can pay future claims – this means that you have the right to expect fair and prompt treatment at claim time.

*Source: Tower Health and Life claims information 2005.