Simply put, when the stock market goes down, insurance rates usually go up. That’s because most insurance companies invest in the markets to raise profits. When their investments go down, the companies raise premiums to offset the loss.

Insurance companies collect premiums from their customers. When someone files a claim, the company has to pay out—but in the meantime, most insurance companies invest their premiums in stocks, bonds, and other vehicles. This maximizes profits when times are good—bringing in more money than the collection of premiums could generate alone. When the stock market goes down, however, insurance companies lose profits—which can look bad to shareholders. In order to make up the loss, they raise premiums.

It works the other way around, as well. This article in the New York Times outlines how rising insurance rates can make things more difficult for start-ups and smaller businesses in particular, making them less likely to hire and expand. This may be one of the reasons the US is taking such a long time to recover from the global financial crisis—because small companies struggle more now than they did before to pay for insurance required to do business.

In addition, crashing stock market values make individual consumers feel more vulnerable. Combine that with rising health, life, and property insurance rates, and individuals may be less likely to reinvest their money in the stock market—or have extra money to invest in the first place. This can affect stock market prices negatively as well.

Small insurance companies may invest less heavily in the stock market to increase profits than large companies do—because they often have less of a surplus. However, bad financial times can lead to unsteady profits for small insurance companies as well. In addition, insurance companies of all sizes are equally vulnerable to increased rates of insurance fraud during recessions. If a small insurance company is hit with more claims than usual—or one or more fraudulent claims—they may have to raise prices to offset the loss.

This is an extremely simplified explanation of all the market forces at work, of course—but provides a good general overview. Next time we go through a big stock market crash, be ready—your insurance premiums are much more likely to go up even as you lose money.

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