Car insurance – What are the most important pricing factors

Anyone who has had to purchase car insurance may very well have discovered huge discrepancies in the different quotes they are asked by different insurance companies. This has always been the case to some extent, but even more so given the rise of online cost comparison sites. It is quite possible to go to one of the major sites, enter its coordinates and obtain up to fifty different quotes. It is not uncommon for these ratings to be between 200 and 2000% different from the top to the bottom of the scale.

People unfamiliar with the insurance industry wonder how there can be such large discrepancies. While this may be relevant, the most important thing is to realize that these discrepancies exist and take advantage of them in order to get the best deal possible. It is important to point out that the best offer 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 roughly the same way. This is true to some extent, depending on how much data they have and their experience with risk underwriting. Different insurance companies will have different levels of expertise in certain geographies, regarding certain car brands, and certain age groups and demographics. This experience will influence their understanding of risk, and may differ widely from that of other insurance companies who will have more on this experience in these areas.

Risk assessment is not just a mathematical formula, although in theory that is what it is based on. While an insurance company will assess a risk based on its own criteria and then charge it a small margin to make it profitable, that’s only half the story.

There has always been theory and practice about how insurance companies assess risk. The theory is that they will rate a risk, basically as a percentage, which they charge as a premium. In reality, it’s also a lot about what they can charge, or get away with, in order to win the case and make money out of it.

This has greatly intensified the transition to many car insurance online, where it is considerably easier for insurance companies to link it to other types of insurance, and to various utility billing accounts, debit cards credit or loan financing. This means that insurance companies can enter into strategic alliances with other companies in order to obtain business that is to their mutual advantage.

Insurance companies will often compromise in ways that many businesses will in order to attract customers, and hope that building customer loyalty over time will allow them to both increase their premiums and maintain the activity without customers moving elsewhere. Although this is a fairly basic principle of how insurance companies operate, it is much more difficult to do online, it was much easier on paper. These days, it’s very easy for a customer to switch insurance companies, which certainly eroded a lot of loyalty to companies before.

The other important factor is that insurance companies derive much of their profits from investment premiums, as opposed to pure underwriting profits. With most types of insurance, premiums are paid up front and claims paid much later. With auto insurance, the really big claims tend to be liability claims, which are notoriously difficult to settle and normally take several years to settle.

It is not necessarily insurers who are dragging their feet, although it can happen. With liability claims, it often takes a long time to really assess the damage done to an individual, and how that damage impacted their life, and in what way.

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

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