As a college Professor of Insurance, I have noticed that when college students take that important step into independence and start paying for their own car insurance, most of them continue buying car insurance from the same company their parents used. Many times their parents have been insured by this company since they became drivers too. It never occurs to these students (or their parents) that all insured drivers should “shop around” for affordable car insurance. Maybe they assume that every insurance company charges the same rate for the same risk, and maybe they believe that all insurance coverage is essentially the same. But neither of these assumptions is true. In fact, two different insurance companies can and often do price their insurance policies very differently for the same driver.
So how do insurance companies decide how much to charge for the insurance policies they sell? Unfortunately there is no way around it: it’s complicated! Specialized professionals known as insurance actuaries spend many years studying actuarial science to learn how to “price” insurance policies. Actuaries use mountains of statistical data to determine the prices for insurance policies. This data includes internal company information, such as the number and types of customers an insurance company currently insures, as well as external data, such as accident risk for a specific vehicle or theft risk for a particular zip code.
But you don’t have to be an insurance actuary to see that insurance rates do vary from company to company. If you don’t already “shop around” for insurance, this article will hopefully encourage you to begin the process and equip you with information that will help you make the best decisions to meet your car insurance needs.
First, think about what insurance companies are actually selling. They sell a “promise to pay” in the event of a covered loss. That means that, up-front, they are not selling anything of value other than their promise. It also means that, other than some up-front labor and overhead costs, they don’t know how much this promise is going to eventually cost them. It just depends on the amount of covered losses they end up paying, which they sometimes pay many years after they collect the premium.
So how do they decide what to charge? To put it simply, insurance companies base their price or “rates” on past losses and on how they expect those losses to change going forward. So, if two companies are trying to price insurance for the same “risk”, i.e. driver, why would they the risk a different rate?”
There are two primary reasons insurance rates vary from company to company:
- Different appetites for risk
- Different levels of service and claims payments
Different Appetites for Risk
Yes, that’s correct, different insurance companies have different appetites for risk, much like different people have different appetites for where they invest their money. One person might choose to invest in high-risk technology stocks while another might prefer to invest low-risk municipal bonds. For insurance companies, their appetites for risk are frequently dependent on their need to accomplish two sometimes conflicting goals: marketing and diversification.
Marketing: Insurers might price products more competitively, i.e. charge less for a policy, when they want to leverage a certain marketing tool they have in place. For example, a company might have an agency force or other marketing mechanism that is geared particularly well to selling insurance to older drivers. So in order to further support their advantage in marketing, they might charge less than their competition to older drivers while they charge more to younger drivers.
Diversification: Conversely, an insurer might decide they have too much of a concentration in their book of business of a particular type of insured (e.g. maybe older drivers) so they lower their rates for younger drivers and raise rates for older drivers. By doing this they hope to attract more younger drivers and develop a book of business (a group of insureds) that is more balanced.
Below are 10 ways insurance company rates commonly differ and some examples of those differences:
- Age – Some companies are more competitive with younger drivers than others
- Credit score – While most companies today do use credit score as a rating factor for auto insurance, some are more forgiving than others of low credit scores for certain reasons like divorce or age
- Location – Some insurers prefer city drivers while others might want more rural drivers; also, if an insurance company has a very geographic concentration of insured drivers that exposes them to catastrophic loss, they might begin to price higher in those areas than other insurers
- Some reward persistence – With some insurance companies, rates go down the longer you are with the company; other insurance companies try to draw new business with rate discounts
- Education and military service – Some insurers offer discounts for good students and for military personnel
- Loss history – Nearly all insurers increase their rates for drivers with a loss history, but some have more generous good driver discounts while others are more forgiving of a poor accident history
- Type of car – Some insurers do not penalize significantly for driving a sports car, but some insurers will price them higher
- Work or pleasure – Some insurers prefer work commuters; others prefer those who drive more for pleasure
- Male or female drivers – If an insurance company finds they have an abundance of male drivers, they might raise rates (even more) on male drivers and lower them on female drivers to even out their mix of business
- Multiple policy discounts – Some insurance want to sell you their life, health and homeowners insurance along with your auto insurance, while others are only selling auto insurance
To some extent, the old adage “you get what you pay for” is true even with insurance. If the insurance is “cheap”, there is a chance that the insurance company is more stringent when it comes to paying claims and not as good at providing service. Some insurers have a tendency to pay lower claims amounts or to fight questionable claims more aggressively.
When an insurance company fights truly fraudulent claims, this is not a bad thing for honest policyholders because it keeps the cost of insurance down in the long run. But some companies have a reputation for taking longer to pay legitimate claims and generally making the claims process difficult. This might be because they are understaffed or because they simply hope that policyholders will accept lower claims payments if the process has been tedious for them.
The best way to find out whether a company has good claims service (as well as other services) is to ask others who have had a claims experience with the company. Tell coworkers, neighbors, family and friends that you are thinking about switching your car insurance and ask them to talk about their experience with their insurance company, particularly if you know they have had a claims experience.
Many states’ Departments of Insurance can tell you which companies have received the highest level of complaints and sometimes even about the nature of those complaints against the company. A link to your state’s insurance department website can be found at the National Association of Insurance Commissioners website at http://www.naic.org/state_web_map.htm.
In general, large, multi-line national companies tend to reward persistence and good driving records. They tend to be more conservative in the types of risks they take on but better at service and often more generous with claims payments. But there are exceptions, so it is best to shop around and ask around to find the best company for the best price for you!
By the way, if you have a complaint against an insurer’s or agent’s handling of a claim or any other service they provided, go to https://eapps.naic.org/cis/fileComplaintMap.do for a map that will take you directly to your state’s complaint filing department. Most states allow you to file the complaint electronically. This will help others like you when they are trying to decide which company is the most appropriate for their insurance needs.
Car Insurance List can be a great resource for comparing different insurance options. To request a car insurance quote, you only need some basic personal and vehicle data and your zip code.. You’ll find also comparisons and car insurance reviews of some of the leading carriers in the country, as well as tips for finding affordable car insurance, industry news, and state-by-state information on auto insurance requirements and statistics.
Dr. Christine Berry is a Professor of Insurance and a widely published insurance expert.