The Dynamics of Auto Insurance

An insurance policy is an intangible product.  You cannot touch it, you cannot play with it, and you cannot “try it on” to see how it fits.  Insurance is a promise of service; it’s a commitment to provide for the policyholder after they have sustained a covered loss, to make them whole again.  Insurance is a concept of pooling money that evolved from former historical practices, one of which involved merchants paying into a pool to cover their goods that were being shipped.  When one of the merchants sustained a loss, they could tap into that pool of money in order to make themselves whole again.  The same concept holds true today with insurance.  Policyholders pay money to an insurance company. In return for the premium they pay, the insurance company contractually makes a promise to reimburse the client if they sustain a covered cause of loss as defined by the insurance contract.  

The rates the insurance company charges are based on actuary calculations that attempt to measure the amount of the risk they are taking on by predicting the potential for the loss and the potential monetary value of such loss.  Based on these calculations, the insurance carrier charges a rate of “X” amount of dollars per a set unit of coverage.  An example of this is applying a charge of $.75/$1,000 of Bodily Injury Liability coverage for Auto Insurance. 

Different factors play a part in the determination of a particular rate.  Insurance companies will review their rates on a set annual or bi-annual basis and make adjustments when they see the need. Each carrier provides, analyzes, and continuously adjusts coverage for clients of a particular age and gender located in certain locales in order to keep rates fair and accurate.  For example, if an auto insurance carrier is analyzing rates for the 20002 zip code in Washington DC and they notice that they are paying out more claim dollars under the collision coverage for drivers ages 16 to 21, clients of the carrier who fall in that age category will probably see a rate increase under their collision coverage when their policy renews.  On the flip side, if the carrier notices that there are significantly less premium dollars being paid out under Bodily Injury Liability for the married couples between ages 45 to 50 in residing in the 20002 zip code, chances are clients of the carrier who fall under that category will probably see a rate decrease in that area when their policy renews.

It is a common complaint that insurance rates always go up and never go down.  This is not an accurate generalization.  If a carrier observes that they are bringing in premium dollars in excess to the claims being paid out in a particular area or of a particular age category within their auto client base, chances are their competitors are witnessing the same kind of results.  If the carrier does not follow through and adjust rates down accordingly, they risk losing a significant amount of market-share in that area to their competitor. This is the advantage of a Free Market! What people must also realize is that in theory, auto insurance rates should rise slightly every year.  As society sees an increase in the cost of things such as medical expenses and vehicular repair/rebuilding and as averages in litigation lawsuits rise, insurance should similarly increase since it is facing these greater costs.  Therefore, if an insurance rate remains the same the following year, one can argue that this could be a considered a decrease in premium relative to the market since the insurance carrier is not increasing auto insurance rates to keep up with their increased expenses.

Although consumers generally do not have the same level of buyer’s excitement when shopping for a car insurance quote or purchasing a new auto insurance policy that they do when they experience the thrill of buying the actual car, insurance does provide an essential peace of mind.  For the auto insurance consumer, it’s the peace of mind that comes from knowing that their new purchase is protected and that for a few dollars they will be reimbursed a far greater amount if that new car were to become damaged or if a tragedy were to occur as they are learning to drive it, causing serious bodily injury.

Always keep in mind that when purchasing an auto policy, it’s always best to seek advice from an insurance agent who can counsel you on your coverage options and tailor-make your policy to best fit your personal needs.

Posted by: Robert Lafaro