man going over financial graphs, how global financial markets actually have an impact on your home insurance costs

Did You Know that Low Interest Rates Mean Higher Insurance Premiums?

Learn how global financial markets actually have an impact on your home insurance costs.

When you think of your home insurance, you probably think about it in terms of your personal finances.  This is why many homeowners are surprised to learn that their home coverage is actually highly dependent on the global economy.  But how do global financial markets actually have an impact on your home insurance costs?  Here’s what you need to know.

Insurance companies operate according to something called a loss ratio.  This ratio considers the premiums that they take in from their clients and the money that they pay out for claims.  For instance, a loss ration of 1.00 means that for every dollar the insurer collects in premiums, it pays a dollar out in claims.  In this ratio, the insurance company is just breaking even, so to make a profit, you would assume that the insurance company needs to charge more in premiums.

However, many insurance companies are actually operating at loss ratios greater than 1.00.  This means that they are spending more on claims and other expenses than they are collecting in premiums.  The reason that these insurance companies are able to continue operating and generate a profit is because they rely on something called investment income.

Investment income refers to the money that insurers earn by investing their clients’ premium payments.  Because its unlikely that an insurer will collect premiums and have to pay out the same amount in claims at the same time, insurers use this time to invest premium money and earn interest.  There are certain types of insurance that take longer than others to pay out a claim; this is because insurers are using this extra time to continue earning investment income.

Unfortunately, in times of low interest rates, it takes longer for insurance companies to earn enough investment income to turn a profit.  To make up for this loss of income, insurance companies charge their clients higher premiums.

This is how global financial markets actually have an impact on your home insurance costs.  Do you have additional questions about your home coverage?  If so, then contact the experts at Tri-Star Insurance/HUB International.  We are ready to assist you with all your home coverage needs today.

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