Should I File an Insurance Claim?

We’ve probably all asked ourselves this question at one time or another. The bigger question is how will filing a claim affect my rate?

Fact is, filing a claim will adversely affect your future premiums with your current carrier or any other carrier. You see, like a credit score, we all have an “insurance score.” An insurance score is basically a tool an insurance company will use to determine the probability of you filing an insurance claim in the future.

Many factors go into calculating an insurance score. The process is quite sophisticated and can include anything from the type of claim you filed, the amount of the claim, location, history and maybe even a little artificial intelligence to predict your individual propensity for filing a claim. Each carrier will weigh these factors differently based on their own risk pool, but the “premium penalty” is almost a certainty.

A premium penalty is the increase in premium for filing a claim. This premium penalty will typically follow you for an average of 3 years, however some carriers could penalize you for as long as 5 years so it’s important to shop around. The premium penalty on average is 30% but could go as high as 50% with some carriers.

So why are premiums affected? Well, it simply comes down to this; all things being equal, fewer claims means lower risk which equals lower premiums. So back to our original question; should I file an insurance claim? Let’s break down some numbers.

First let’s see how much we will pay over the next 4 years if no claims are filed. We'll use an annual premium of $2400 and a 2.5% standard rate increase per year. We'll also use an average 30% premium penalty in scenario 2.

SCENARIO 1

Year 1: $2400 (annual premium)

Year 2: $2460 (yr. 1 annual premium + 2.5%)

Year 3: $2521.50 (yr. 2 annual premium + 2.5%)

Year 4: $2584.54 (yr. 3 annual premium + 2.5%)

Total: $9966.04

If we have no claims on our insurance score, we would have paid $9966.04 for insurance over this 4-year period. Now let’s have a look at the real cost of filing a claim.

SCENARIO 2

Year 1: $3400 ($2400 + $1000 deductible)

Year 2: $3198 ($2400 + 2.5% + 30% premium penalty)

Year 3: $4261.34 ($3198 + 2.5% + 30% premium penalty)

Year 4: $5678.24 ($4261.34 + 2.5% + 30% premium penalty)

Total: $16,537.58

Filing a claim in this case resulted in a net premium increase of 65.94% or $6571.54 over the same time period.

In scenario 2, if you needed to replace a roof, probably makes sense to file a claim if the cost to replace the roof is more than $6571.54. If you have a $3000 bill for water backup or have a $1000 auto repair, might not be a bad idea to work out the numbers first.

Remember, every insurance carrier treats an insurance score differently. Working with an independent agent has many benefits. As an independent we represent a number of different insurance carriers, and we can help you shop around. We also work closely with underwriters to help estimate premium increases before filing a claim.

Of course, every financial situation and circumstance is different so before you move forward with filing a claim, give us a call and let’s see if filing a claim makes sense for you.

-Alan Romero, Agency Owner