It is almost entertaining to see how many insurance ads are being posted by various companies all suggesting if you buy from them you will get the cheapest insurance available. It is just as entertaining to see how many are now advertising to just buy the insurance you need as if you have been paying for coverages which are not necessary.
By pointing this out, the author is not saying you can’t find the cheapest insurance premium available or that you should carry more insurance than necessary. Just saying buyer beware. It has always been a pretty fair observation that you get what you pay for.
Every insurance company has to deal with the same factors which affect the computation of insurance premiums. They all deal with administrative expenses of day to day operations of the company, the rise and fall of interest rates which affect the value of the dollar, severity and frequency of claims, managing retirement funds for present and future retirees, inaccuracies of actuarial computations, maintaining adequate reserves for unexpected events, etc.
Having said the above, there are some insurance companies who have survived long enough to have a good track record on premium to expense ratio. Longevity and experience help to stabilize the cost of the product being sold to the public. However, they also have factors which present downsides:
Having to provide funds for retirement for an aging workforce.
People living longer than what the projections were when calculating the amount needed to fund vested interests creates a real dilemma for these well established companies.
Inflation and volatility of financial market places a great deal of stress on these retirement promises.
Antiquated operating systems attempting to keep pace with modern hardware and technology used by new startup companies creates some real financial issues. In most cases when an insurance company tries to update to a new system they must run both the old and new systems for a period of time so business can continue as usual. Training present employees also doesn’t come cheap.
New startups can match the advantages of longevity and experience with new technology, lower requirements for maintaining programs for retirees, and much less overhead in capital investments.
What then makes the difference between what one company can charge as opposed to another and still maintain profitability and ability to meet future claims? It really comes down to efficiency in operation, strictness in overseeing what is being paid out in claims, ability to manage investments profitably, and efficient underwriting of new business and culling of unprofitable existing business risks.
This last method for maintaining a profitable business impacts the buying public in a very real sense. You buy insurance to protect yourself against future loss, but if your frequency and severity of losses marks you as a poor risk you will find yourself shopping again for a better rate. What can you do?
If you are looking to be a new homeowner, spend some time in looking at houses in a good protection class area. Properties found in areas with good fire protection–availability and ability of fire department to deliver water, strategically placed fire hydrants and clear spaces, properly trained firefighters, community crime watch, an alert police force, materials used for construction, etc.–receive a protection class designation by your state fire rating bureau more favorably than the same structures in less protected areas.
Once you have found the house you like, select an insurance company with a reputation for being honest and fair with its customers. Does it have a good history of paying its claims? What are consumer reports with the Department of Insurance saying regarding the company? Does it have an A or A+ rating with an independent rating company like A.M. Best? Do you feel comfortable with the company’s local representatives?–a few items to consider.
This is now where choosing appropriate coverages determines the expense of insurance. (This is where cheap insurance ads begin to entice.) This is where you make the decision as to what side of a claim you want to have expenses. If you choose to have high deductibles, co-insurance at less than 100% of replacement costs, and limited risk coverages, then you keep your premium (cheap) lower. Your rationale would have to include the thought of risking the chance of having no losses. You accept the fact if you do have a loss you have a much better chance of paying more at that time to recoup your loss. It’s kind of like the old Fram oil filter ad where the mechanic posing by a vehicle with the hood up, with apparent engine damage, holding an oil filter saying, “You can pay me now or you can pay me later.”
With car insurance go through the same process of finding a company you feel comfortable with and then determining what coverages you really need. The ad suggesting you purchase only what you will need is pretty open ended. It carries the inference you are probably paying for coverages you will never use, so you stand to save substantial premium dollars by not paying for them to begin with–when in reality, how do you know what you will need until you need it? This is a good time to remember the adage, you can’t order a parachute up while the plane is coming down.
The control you have comes from two sources: 1) type of coverage and 2) the amount of coverages.
Type of coverages fall in the categories of liability, medical, uninsured and underinsured motorist, material damage and ancillary coverages i.e., additional living expenses, accidental death and dismemberment, driver of other vehicles, roadside assistance, and newly acquired vehicle. The first ones of liability and material damage have some requirements either by law or by lienholder; others you have discretion on whether or not you will purchase them. These others are normally so low in percent of premium (cheap) being paid, you won’t see much of a savings if you choose not to purchase them.
The second control has to do with the amount of coverages and deductibles to be applied. Liability coverages can be minimums required by state law (most states have as a minimum $15,000 per person, $25,000 per occurrence) up to $500,000 per occurrence before going into umbrella type coverages. Material damage loss expenses are controlled by deductibles you choose when purchasing insurance. The higher the deductibles the lower the premium, but the higher expense you pay if there is a loss. Again, it is a matter of when you want to pay the money rather than if you will pay. Insurance companies don’t mind you paying with higher deductibles because for them the administrative expense for a loss is pretty much the same except in major loss encounters.
In summary, let the advertisements continue for cheap insurance and buy only what you need because it encourages consumers to invest in their purchase of insurance. It is this author’s hope it will help you be a savvy customer because you will have done your homework before making a purchase. You may not end up with the cheapest insurance but you will end up with appropriate insurance coverage for what you need.
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