MALVERN, PA — The Insurance Information Institute (Triple-I) has released a new Issues Brief warning that government intervention in the property and casualty insurance market could destabilize the industry and ultimately harm consumers by distorting the principle of risk-based pricing.
Risk-based pricing, a cornerstone of insurance underwriting, adjusts premiums according to the level of risk associated with each customer, vehicle, or property. By aligning price with exposure, insurers can offer lower rates to policyholders who present less risk while maintaining sufficient reserves to cover claims.
“Without risk-based pricing, lower-risk consumers would end up subsidizing riskier ones,” said Sean Kevelighan, CEO of Triple-I. “That would force insurers to overcharge some customers and undercharge others, putting the companies’ financial stability – and their ability to pay claims – at risk.”
Misconceptions and Policy Pressures
The report acknowledges growing public concern over the use of certain rating factors—such as credit-based insurance scores, geographic location, and other individual variables—that some critics consider unfair. However, the Institute argues these metrics are actuarially sound and essential for maintaining fairness and solvency.
Citing data from the National Association of Insurance Commissioners, the report notes that drivers in the lowest 10% of insurance scores have twice as many collision claims as those in the top 10%. Such data, the Institute says, demonstrates that pricing based on risk is both fair and necessary to ensure financial sustainability across the market.
Climate Change and Inflation Challenges
Triple-I’s analysis also underscores how climate-related risks and inflation have compounded pressures on insurance pricing. Areas once considered low-risk are now facing increased exposure to wildfires, floods, and hurricanes, while rapid population growth in vulnerable regions amplifies losses.
“Insurance pricing must reflect these increased risks to maintain policyholder surplus—the funds regulators require insurers to keep on hand to pay claims,” said Patrick Schmid, Ph.D., Chief Insurance Officer at Triple-I. “Rising material and labor costs also drive premium increases. If rates don’t reflect these costs, insurers risk exhausting their policyholder surplus and potential insolvency.”
Pathways to Affordability and Resilience
The Issues Brief advocates for collaborative solutions between insurers, policymakers, and communities to manage affordability without compromising solvency. Key recommendations include:
- Strengthening and modernizing building codes.
- Incentivizing resilience investments by homeowners.
- Avoiding price controls that restrict insurers’ ability to price risk appropriately.
“Strong building codes and proactive mitigation are critical to protecting communities and keeping insurance affordable,” Kevelighan said. “These measures help insurers remain financially strong so they can pay claims when disasters strike.”
Triple-I’s report concludes that preserving the integrity of risk-based pricing, combined with coordinated investments in mitigation and resilience, remains the most effective strategy for ensuring long-term affordability and market stability in a changing risk landscape.
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