Car Insurance – Which Rating Factors Are Most Important?

Anyone who has had to purchase car insurance may have discovered major discrepancies in the various quotes asked by different insurance companies. This has historically always been the case to some degree, but even more so given the rise of online cost comparison sites. It is entirely possible to go to one of the major sites, enter your information and get up to 50 different quotes. It is not uncommon for these citations to differ from top to bottom of the scale by 200 to 2000 percent.

Those unfamiliar with the insurance industry wonder how such large discrepancies can happen. While this may be relevant, what’s even more important is to understand that these inconsistencies exist and take advantage of them to get 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 generally assumed that all insurance companies evaluate risk in much the same way. This is true to some extent, depending on how much data they have and what their risk-taking experience is. Different insurance companies will have different levels of expertise in certain geographic areas with respect to certain automobile brands and certain individual age groups and demographics. This experience will impact their understanding of risk and may be very different from other insurance companies will have more of this experience in these areas.

Grading a risk is not just a mathematical formula, but is based on theory in theory. When an insurance company evaluates a risk on its own criteria and charges it with a small margin to make it profitable, that’s only half the story.

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There has always been theory and practice about how insurance companies rate risks. The theory is that they will rate a risk as the one percent figure they charge, essentially as a premium. In reality, it’s also about what they can demand or run away from in order to get the job and make money out of it.

This has greatly intensified the shift to a lot of car insurance done online, where it is much easier for insurance companies to link to other types of insurance and various billing accounts, credit cards or loan financing. This means that insurers can form strategic alliances with other companies to achieve mutually beneficial businesses.

Insurance companies will often undermine each other to attract customers, as many businesses do, and they hope that customer retention over time will allow them to both increase their premiums and keep the business going without customers moving elsewhere. While this is a pretty basic principle of how insurance companies work, it was much more difficult to do online, much simpler on paper. It’s all too easy for a customer to change insurance company these days, and this has certainly eroded much of the loyalty previously felt to companies.

Another important factor is that insurance companies derive most of their profits from investment premiums, as opposed to pure underwriting profits. In most types of insurance, premiums are paid upfront and claims are paid much later. With car insurance, truly large claims tend to be claims that are very difficult to fulfill and normally take several years to agree on liability.

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While this can happen, insurers don’t have to be dragging their feet. Liability claims often take a very long time to truly assess the harm done to an individual and how and in what ways that damage has affected their lives.

This also means that for a period of time the insurer will generally not have to make a claim. They may make an interim payment, but this is normally at their discretion. This means that companies can hold off on premiums for quite some time before any compensation is paid. This allows them to generate substantial investment income that they can use to balance their rating levels to attract the business they need.

About Lily Hammond

I have been working as an insurance consultant in my own insurance agency since 1998. Because I've been doing this for so long, I know every detail and I'm here to help you. You can find my e-mail address and work phone on the contact page.

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