Wealth Planning Commentary – September 15, 2025

Lower Rates Likely Raise Your Insurance Premiums 

It is very possible that the Federal Reserve will lower interest rates this week, and this could potentially affect the premiums you pay for your property and casualty (P&C) insurance. 

The relationship between interest rates and insurance premiums isn’t immediately obvious, but it’s a fundamental part of the industry’s financial model. As a client, you might think your premium is simply based on your risk profile and claims history, but it is also highly sensitive to the broader economic environment. 

The Connection Between Interest Rates and Your Premiums 

The reason P&C insurance premiums are so sensitive to interest rates is due to the way insurers make money. The industry has a two-part business model. The first part is underwriting, which involves collecting premiums and paying out claims. The second, and often more important, part is investing. 

When you pay your premium, the insurer doesn’t immediately use that money to pay a claim. Instead, they invest that capital, called the “float,” to earn a return. A significant portion of these investments is in bonds and other fixed-income securities, which generate interest. This investment income is a critical source of profit for the industry—in fact, for many insurers, it’s their main source of profit, often offsetting losses from their underwriting business. 

When interest rates fall, the interest earned on these investments decreases. As their older, higher-yielding bonds mature, insurers are forced to reinvest that money at the new, lower rates. This erodes a key pillar of their profitability. 

To make up for this lost income and maintain financial stability, insurers are compelled to increase premiums. Think of it this way: if a portion of their income is shrinking, they have to raise prices on the other side of their business (your premiums) to stay profitable. This is especially true for “long-tail” insurance lines, like commercial liability, where claims can take years to settle, giving insurers a large pool of capital to invest over a long period. 

Other Factors Driving Higher Premiums 

The pressure from falling interest rates isn’t happening in a vacuum. It’s happening at the same time as other major trends that are already pushing up the cost of insurance. When these factors combine with falling interest rates, it can amplify the need for significant premium increases. 

• Economic Inflation: The rising costs of everyday goods and services directly impact what insurers pay out in claims. For example, the cost to repair a damaged home has increased due to rising prices for lumber, labor, and other building materials. Similarly, the cost to fix a car is higher due to more complex parts and rising repair shop labor rates. This means the same claim costs an insurer more today than it did a year ago, which puts upward pressure on premiums. 
• Catastrophe Losses: An increase in the frequency and severity of natural disasters leads to a greater number of high-cost claims, requiring insurers to raise rates to cover the losses. 
• Social Inflation: This refers to the increase in claims costs that goes beyond general economic inflation. It is driven by societal trends, such as larger and more frequent jury awards (often called “nuclear verdicts”), a greater willingness to sue, and the rise of third-party litigation funding. These factors significantly increase the cost of claims for insurers, particularly in liability lines, and have become a major concern for the industry. 

When interest rates decline and economic and social inflation are on the rise, it creates a “perfect storm” for insurers. Their investment income is falling just as their claims costs are soaring. This leaves them with a single path to profitability: raising premiums to an extent that covers both rising costs and declining investment income. 

The combination of these factors can lead to premium adjustments that may seem out of sync with your individual risk profile. It’s a reminder that insurance is not just about your personal circumstances—it is an intricate business that is fundamentally tied to the broader economy. 

Disclaimer: This communication is for informational purposes only and does not constitute a recommendation or a solicitation to purchase or sell any insurance products. The views expressed here are those of our financial planning team and are not intended to be a complete analysis of every material fact regarding any company or investment. The information contained herein is based on sources believed to be reliable, but its accuracy and completeness are not guaranteed.