The Dynamics of Auto Insurance
An insurance policy is an intangible product. You cannot touch it, play with it, or try it on to see how it fits. Insurance is a promise of service; a commitment to the policyholder to make them whole again after a loss. The concept of insurance dates back to prehistory — archaeological evidence suggests that sailing merchants would pay into a pool to cover the goods that were shipped. When a merchant would sustain a loss, they could tap into that pool of money in order to compensate for the loss of their product. The same basic concept holds true today with insurance. Policyholders pay money to an insurance company. In return for the premium they pay, the insurance company makes a promise to reimburse the client if they sustain a loss, provided the cause of that loss is covered under the terms of the insurance policy.
The rates charged by the insurance company are based on calculations made by an actuary (a professional who uses advanced math to measure risk and uncertainty) that attempt to determine the amount of the risk the company takes on. They do this by predicting the potential for loss and the monetary value of said loss. Based on these calculations, the insurance carrier charges a rate of a given dollar amount per set unit of coverage (e.g. $.75/$1,000 of Bodily Injury Liability coverage for Auto Insurance).
When it comes to rates, there are different factors at play. Companies will review their rates on an annual or bi-annual basis and make adjustments as they see fit. Each carrier analyzes and continually adjusts coverage to keep rates fair and accurate for all clients based on factors like age or location. For example, if an auto insurance carrier is analyzing rates for a given zip code, and they notice that they are paying out more claims for drivers ages 16 to 21, clients in that age category will likely see a rate increase when their policy renews. On the flip side, if the carrier notices that there are significantly less premium dollars being paid out for married couples between ages 45 to 50 in the same zip code, chances are those clients will see a rate decrease.
It is a common complaint that insurance rates always go up and never down, but this is not really accurate. If a carrier observes that they are bringing in premium dollars in excess to the claims being paid out in a certain demographic of their client base, their competitors likely are too. If the carrier does not adjust rates down accordingly and their competitor does, they risk losing market share to their competitor. This is the advantage of a Free Market!
In addition, auto insurance rates should theoretically see a slight rise each year. As we see an increase in the cost of things like medical expenses, vehicular repair, and litigations costs (due to inflation and other such conditions), insurance costs should increase in kind, since these specific cost increases directly affect the carrier. Therefore, if an insurance rate remains the same one year to the next, this could be a considered a decrease in premium relative to the market, since the insurance carrier is not increasing rates to keep up with their increased expenses.
Although consumers may not have the same excitement when shopping for a car insurance quote or a new policy that they do when they buy the 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. For a relatively nominal fee, should there be an accident that damages the car or injures someone, the consumer will receive a much larger payout in return.
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