How Rates Are Set
An insurance rate is a forward-looking estimate of the cost of risk — not simply a reflection of last year's premiums or today's policy debate. Here's what actually goes into it.
Click any part of the rate
Every actuarially sound rate is built from three components. Tap to explore each one.
Estimated Claims
What insurers expect to pay in covered claims over the policy period. Actuaries project these losses using a mix of Texas-specific data and forward-looking models.
- Historical claims data
- Weather and catastrophe trends
- Geography and exposure
- Auto repair and parts costs
- Medical costs
- Construction and rebuild costs
- Catastrophe modeling
- Future risk projections
Why rates must be actuarially sound
Rates that are too high can harm consumers. Rates that are too low can harm consumers too — because inadequate rates may cause companies to reduce exposure, tighten underwriting, limit new policies, or leave parts of the market.
- Consumers overpay relative to risk
- Erodes trust in the marketplace
- Invites legitimate regulatory scrutiny
- Reflects expected claims and real expenses
- Supports solvency and Texas market participation
- Preserves consumer choice and competition
- Companies tighten underwriting
- New-business writing slows or stops
- Availability declines in higher-risk areas
Texas policy should reject both excessive rates and inadequate rates. The goal is a competitive market with actuarially sound pricing, strong regulatory oversight, and real consumer choice.
If rates are held below risk, affordability may look better on paper — but availability can get worse in the real world.
A sound rate funds expected claims, the cost of running the business, and the financial strength to keep promises after a major event. Rates set below that line are not affordability — they are a transfer of risk to consumers who later cannot find coverage.