Insurance Industry
MYTH: Insurance companies are making a fortune on premiums.
FACT: Of every dollar insurance companies collect in premiums, 60 cents
goes back to policyholders to pay claims, 18 cents goes to pay operating
expenses and 16 cents goes back into communities in the form of taxes.
Insurers keep 6 cents as profit.
From 2000 to 2004, the insurance industry’s earnings were substantially
lower than the earnings of the rest of the financial sector. In 2002,
the industry's earnings were at an all-time low. That year, investors
got an average return of 1.7% on their money, which is unacceptably low
for any business. Imagine if you bought shares in a company, a risky proposition
at the best of times, and you got a smaller return on your investment
than you could have gotten from a bank savings account.
In 2004 and 2005, financial results were generally much better, and car
insurers reduced premiums in every jurisdiction where there was a privately
run, competitive insurance system.
MYTH: Rates started rising because of the insurance costs of the events
of September 11, 2001.
FACT: The terrorist attacks of September 11, 2001 are often cited as
“The Cause” of the last round of rate increases, but in fact,
the insurance industry has survived similar losses before. Although this
event — at the time the world’s largest insurance loss ever
— did not help the insurance picture, those within the insurance
industry understand that the market had already become more difficult
and strained prior to the attacks. The 1998 ice storm is the largest and
most expensive natural disaster in Canadian history and, although it was
bigger as a share of the Canadian market than September 11 was relative
to the size of the US insurance market, it had very little impact on the
price consumers paid for insurance afterwards.
What the events of September 11 did do is change how the insurance industry
looks at risk and the cost of risk.
MYTH: Insurers don't pay for damages caused by "Acts of God."
FACT: The words "Act of God"
do not appear in any home, car or business insurance policies in
Canada. In fact, insurers frequently pay for claims stemming from events
that some might call "acts of God," such as hurricanes, wildfires, high
winds and hailstorms.
It's true that some natural events are excluded from insurance policies,
but there are sound reasons for this. One example of a natural event
that is excluded from insurance policies is overland flooding. This type
of flooding is not insurable because it only happens in very specific
areas - that is, flood plains - where it is almost inevitable. Because
people tend to avoid living in areas prone to this type of flooding,
very few people have a need for overland flood insurance. If it were
offered to those few people seeking it out, overland flood coverage
would be very expensive for insurers to provide (due to the almost
inevitability of costly claims), so premiums would be unaffordable for
most policyholders.
Insurance is about spreading risk among many people. It only works for
perils that are unexpected and that could happen to anyone. Naturally
occurring events such as overland flooding do not meet these criteria.
MYTH: Natural disasters like Hurricane Katrina cause insurance premiums to go up everywhere.
FACT: Major catastrophes
have a direct impact only in the areas where they occur. Elsewhere, they
may have an indirect effect. Here's how it works:
- Insurers also buy insurance. Just like you, your insurance provider
buys insurance to help cover unusually big losses that it couldn't
handle on its own. The insurance that insurers buy is called
"reinsurance."
- Reinsurance companies operate all over the world and pay when
there is a major disaster, such as Hurricane Katrina. If, based on
experience, reinsurers predict a year with exceptionally high losses,
they may raise their rates.
- When reinsurers raise rates, insurance companies here in Canada
may have to pay more for their reinsurance and that, in turn, could
affect the premiums that you pay.
The most important factors affecting your home insurance rates are local
risk factors such as where your home is located, how much it would cost
to rebuild it, how it's heated, etc. Your claims history is also
important.