Auto Insurance: Which Rating Factors Matter Most

Anyone who has had to buy car insurance may well have discovered large discrepancies in the various quotes that different insurance companies ask for. Historically, this has always been the case to some extent, but even more so given the rise of cost comparison sites online. It is perfectly possible to go to one of the main sites, enter your details, and get up to 50 different quotes. It is not uncommon for these quotes to have a difference of between 200 and 2000 percent from top to bottom of the scale.

People unfamiliar with the insurance industry wonder how there can be such discrepancies. While this may be relevant, the most important thing is to realize that these discrepancies exist and take advantage of them to secure the best deal. It is important to emphasize that the best deal is not necessarily the cheapest, but it is also unlikely to be the most expensive.

It is often assumed that all insurance companies assess risk in much the same way. This is true to some degree, depending on how much data they have and what their experience is in underwriting. Different insurance companies will have different levels of experience in certain geographic areas, with respect to certain car brands, and certain individual age groups and demographics. This experience will influence your understanding of risk and may differ widely from other insurance companies who will have more of this experience in these areas.

The rating of a risk is not simply a mathematical formula, although in theory this is what it is based on. While an insurance company will assess a risk based on its own criteria and then charge it by a small margin to make it profitable, this is only half the story.

There has always been a theory and a practice of how insurance companies rate risks. The theory is that they will assess a risk, essentially in a percentage figure, which is what they charge as a premium. It’s also really about what they can charge, or get away with, to win the business and make money from it.

This has greatly accelerated the transition to many auto insurances that are conducted online, where it is considerably easier for insurance companies to link them to other types of insurance and to various utility billing accounts, credit cards, or loan financing. This means that insurance companies can make strategic alliances with other companies to obtain mutually beneficial business.

Insurance companies often undermine each other in a way that many companies will to attract customers, and they hope that customer retention over time will allow them to increase their premiums and stay in business without customers moving elsewhere. part. While that’s a pretty basic principle of how insurance companies work, it’s much more difficult to do it online, it was much simpler on paper. It’s very easy for a customer to switch insurance companies today, and this has certainly eroded much of the loyalty they felt to companies in the past.

The other important factor is that insurance companies derive a large portion of their earnings from investment premiums, as opposed to pure underwriting earnings. With most types of insurance, premiums are paid in advance and claims are paid much later. With auto insurance, the really big claims tend to be liability claims, which are very difficult to resolve and typically take several years to settle.

This is not necessarily that insurers are delaying, although this can happen. With liability claims, it often takes a long time to really assess the harm done to a person, and how that harm has impacted their lives and in what way.

What this also means is that, for a period of time, the insurer will generally not have to settle a claim. They could make an intermediate payment, but that would normally be at their discretion. This means that companies can hold on to premiums for quite a long period of time, before any claims have to be paid. This allows them to earn significant investment income, which they can then use to offset their qualification level to attract the business they need.