Insurance Premiums To The Moon

PossiblyElaine

(This post does not belabor why most people want or need insurance. That has been extensively discussed: What makes buying insurance rational?, When Is Insurance Worth It?, Money threshold Trigger Action Patterns.)

We the people have not been loving our insurance premiums, which has outpaced both inflation and wage increase in the US. Many insurance companies cite policy changes or natural disasters as the reasoning, while a growing population thinks corporate greed is the dominant factor (possibly because of Luigi?). What's happening and what can we do about it?

Where Do Your Premium Dollars Go?

To begin reasoning about the phenomenon, let's first break down where the money went. The majority of each dollar you pay in premiums is spent paying claims and benefits, or waiting to be paid out as benefits (in reserve). Operating expenses are also a liability: employee salaries, commissions for brokers (if that's the distribution system), software, licensed contractors such as inspectors. Then, if there's anything left over, it becomes the profit of the insurance company.

Variance is high company-to-company. One reason is that these companies don't all insure the same risk pool, sometimes due to adverse selection loop, sometimes due to natural diversification of product offering.

Why do Premiums rise?

When premiums rise, there are five possible overt explanations.

Circumstances: external circumstances that cause more frequent or expensive claims, e.g. a less healthy population, wildfires and earthquakes, used cars become more expensive, more frequent travel. Or: external circumstances that cause more uncertainty and need for larger reserves and more expensive reinsurance, e.g. COVID-era travel patterns, climate change.
Greed: increasing profits by raising premiums, which may sometimes be enabled by competitive insurers exiting certain markets, leaving less competition behind.
CapEx: investment in technology or re-orgs that may reduce future costs.
Inefficiency: bloated operations, slow handling causing more payout, incorrect calculations causing more appeals.
Fraud: increasing fraud rate due to generative AI. If insurers cannot catch it, fraud appears as circumstances; if they can, it becomes an inefficiency that creates more antifraud process overhead.

Case Study: US Homeowners Insurance, 2018-2025

Per-policy premiums rose 74% from 2018 to 2025. Expenses rose too, but the expense ratio actually declined, meaning operating inefficiency was not the main driver. Profits fluctuated wildly but are not the main driver: the industry lost money in five of eight years. This means circumstances are the dominant force.

Construction and replacement costs rose 55% between 2020 and 2022 — three times general inflation — driven by supply chain disruptions, labor shortages, and materials costs.
Catastrophe losses exceeded $100 billion in global insured losses for four consecutive years (2021–2024), including record convective storm seasons and the Maui wildfire.
Market withdrawal amplified pricing pressure: State Farm, Allstate, and others stopped writing new policies in California and Florida, concentrating risk among fewer carriers. Remaining carriers are slammed with extra risk they need to reserve extra for, raising the premiums; they're also more at liberty to up-charge due to lack of competition.

Case Study: US Health Insurance, 2018-2025

Premiums rose 38% from 2018 to 2025. Expenses and profits appear stable and lean: the expense ratio declined from ~12% to ~11%, and reported profit margins shrank from 3% to 0.8% by 2024. However, there's a major caveat.

The MLR Rule and Its Consequences

The ACA's Medical Loss Ratio rule caps insurer overhead (admin + profit combined) at 15–20 cents per premium dollar. This incentivized insurers to vertically merge with providers and pharmacy benefit managers: payments to owned subsidiaries count as "medical spending" for MLR compliance, while the profit is booked at the subsidiary. This phenomenon across the medical insurance industry partly challenges the credibility of Fig. 5.

Vertical integration has a second consequence: insurers that own providers lose the incentive to negotiate healthcare costs down aggressively, since they are now on the same side. Historically, insurers served as a counterweight to hospital pricing power through bulk negotiation. Once they're on the same side, they can jointly raise healthcare costs on the patient, which flows back into higher premiums.

Where the insurer-hospital battlefield is still active, the fight has escalated. Hospitals now spend twice as much on administration as on direct patient care: that is, patients are paying more for billing departments, prior authorization staff, appeals processing.

On top of all this, the ceiling of healthcare itself has risen, for example:

Healthcare spending rose 7.5% in a single year (2022–2023), driven by a post-COVID utilization surge including an 80% increase in behavioral health claims.
GLP-1 drugs grew from 6.9% of total claims in 2022 to 10.5% in 2024, at ~$1,000/month per patient.

Current Guesses at Solutions

Now knowing the above, here's what I think would be positive pressures on the insurance industry to lower premiums.

Good for Everyone	Both	Good for Myself
Encourage more competition by local, accurate underwriters.	Compare prices frequently and vote with your wallet.	Submit data when the data helps underwrite me as less risky.
The government can mandate more marketplaces for easier comparisons by consumers.	Submit more data for accurate underwriting.	Notice adverse selection pools and stay away from them (don't move to California?).
Fix the root cause of high claim costs, such as surging medical price tags, by adjusting incentives.		Self-insure when appropriate.
Pooling resources to improve shared fundamental models and datasets such as climate models.		Buy direct instead of through broker.
Pressure AI model providers to watermark generated images and videos to enable fraud detection.
Encourage responsible use of AI to reduce operational costs and improve risk models.
Federal standard regulations on transparency.

More Regulations?

I'm lukewarm on profit-limiting regulations. The Medical Loss Ratio rule has led to over $12 billion in rebates to consumers, which is obviously a good thing. But riding the capitalism dragon with rules is often a losing battle, since what loopholes can be taken advantage of will be taken advantage of, and sometimes this creates new forces and complexities that are even harder to curb. Today, it's not clear that this rule had a net positive impact on premiums.

However, I do think transparency regulations are a good thing. Right now, they are under state jurisdiction instead of federal. The discrepancy between state laws actually creates more burden for insurance companies to operate nationally. Perhaps standardizing some basic transparency practices on the federal level would be beneficial for everyone, especially if the information is also easily digestable on a marketplace platform.

As a participant of democratic society, I sometimes feel stuck between a rock and a hard place when I know something's not ideal, but we've scaffolded a gigantic system (such as everyone needs some insurance) so tall, that individuals can't possibly come up with the equilibrium-resetting, sadness-deleting solution and, at the same time, be confident that it won't implode in some unexpected way. Yet, sometimes the ballot is due, and I'll just vibe-vote on information I have at the time.

My country, Brazil, has much cheaper health insurance costs compared to the US no matter what metric is used, whether absolute value or relative to purchasing power. Coverage is much wider, with almost all pre-existing conditions covered.

It does that by combining several things:

A free public health network of doctors, clinics, hospitals, and pharmacies, available to the entire population without almost no restriction. It has long queues for many procedures, and several other issues, but it's always present, and always with a cost of $0.
Regulated private health insurance, obliged by law to cover a set of health issues, but allowed to cover more if they wish. Those have, each one, their own networks of doctors, clinics and hospitals. Since their coverage is at a minimum the same as the $0 network, they distinguish themselves by offering shorter queues, better facilities, better service etc.
Regulated medication and insurance price increases. Private healthcare providers and medication manufacturer must justify price increases based on demonstrable cost increases, not merely on what the market will bear. Price increases are then allowed to happen once a year, following specific rules. The percentage of increase is widely announced in advance.
A wide market for generic medication. Those need to be approved by our regulator, but basically any medication that leaves patent protection shortly gets five or more generic versions available, all competing with each other. This competition forces prices down.
Limited vertical integration. Private healthcare insurers may own some layers, but not all. Pharmacies, for example, cannot be owned by private insurers. This results in private insurers making deals with several pharmacy networks and several pharmacy networks making deals with each private insurer, for discounts on medications.
A government willing to break patents in case of extreme need. This forces laboratories with patents to sell new medications at reasonable prices, still able to profit, but not to profit by orders of magnitude, otherwise the public benefit may overrule it all.
Private insurers may offer collective packages to companies with less regulatory oversight on, for example, annual price increases, or copay rules. The reasoning for this is that a big company able to contract with a health insurer for its employees has the negotiation skills to get a better deal than the standard government-mandated package. Also, companies get tax incentives by providing private collective health insurance.
Complete transparency on everything, but particularly on prices. No murky, opaque, under the hood deals based on undisclosed rebates and whatnot. Prices are all known to everyone and public.
Health insurance portability. If your insurance is getting worse, you can transfer your plan to another provider, at a similar cost level, and carry your already fulfilled waiting periods with you. Also, the longest waiting period allowed by law is 24 months for pre-existing conditions, though most insurers provide less than that.
A legal system that favor the public over corporations, based on pro-consumer laws. If an insurance provider starts acting funny and denying what it's obliged to provide, the courts side with the public.

We've had American insurance companies that tried entering our market. They left, unable to deal with the rules and the fact they cannot game our health system the way they game the US one. Meanwhile, Brazilian insurance providers are doing fine.

Now, sure, sometimes one or another goes bankrupt due to mismanagement, but there are always plenty of others to move to, which, given point 9, means customers are hardly affected. And, if worse comes to worst, there's always the government network to rely on.

It does that by combining several things:

A free public health network of doctors, clinics, hospitals, and pharmacies, available to the entire population without almost no restriction. It has long queues for many procedures, and several other issues, but it's always present, and always with a cost of $0.
Regulated private health insurance, obliged by law to cover a set of health issues, but allowed to cover more if they wish. Those have, each one, their own networks of doctors, clinics and hospitals. Since their coverage is at a minimum the same as the $0 network, they distinguish themselves by offering shorter queues, better facilities, better service etc.
Regulated medication and insurance price increases. Private healthcare providers and medication manufacturer must justify price increases based on demonstrable cost increases, not merely on what the market will bear. Price increases are then allowed to happen once a year, following specific rules. The percentage of increase is widely announced in advance.
A wide market for generic medication. Those need to be approved by our regulator, but basically any medication that leaves patent protection shortly gets five or more generic versions available, all competing with each other. This competition forces prices down.
Limited vertical integration. Private healthcare insurers may own some layers, but not all. Pharmacies, for example, cannot be owned by private insurers. This results in private insurers making deals with several pharmacy networks and several pharmacy networks making deals with each private insurer, for discounts on medications.
A government willing to break patents in case of extreme need. This forces laboratories with patents to sell new medications at reasonable prices, still able to profit, but not to profit by orders of magnitude, otherwise the public benefit may overrule it all.
Private insurers may offer collective packages to companies with less regulatory oversight on, for example, annual price increases, or copay rules. The reasoning for this is that a big company able to contract with a health insurer for its employees has the negotiation skills to get a better deal than the standard government-mandated package. Also, companies get tax incentives by providing private collective health insurance.
Complete transparency on everything, but particularly on prices. No murky, opaque, under the hood deals based on undisclosed rebates and whatnot. Prices are all known to everyone and public.
Health insurance portability. If your insurance is getting worse, you can transfer your plan to another provider, at a similar cost level, and carry your already fulfilled waiting periods with you. Also, the longest waiting period allowed by law is 24 months for pre-existing conditions, though most insurers provide less than that.
A legal system that favor the public over corporations, based on pro-consumer laws. If an insurance provider starts acting funny and denying what it's obliged to provide, the courts side with the public.