The answer to the question does car insurance fluctuate with the economy is a resounding YES!
Many factors are considered when an insurance company develops its premium model.
Here are a few of the key factors:
- Projected Claim Expenses
- Reserves Limits Required by Dept. Of Insurance
- Costs of Administering Retirement Funds for Employees
- Day to Day Administrative Expenses
- Commission Levels for Sales Personnel (How Much Is Enough?)
- Returns on Investments Portfolio
Many of these factors can be controlled by managing the way in which the company does its business, i.e. taking advantage of computer technology, replacing old methods of underwriting with new state of the art programs, and closely monitoring staff requirements.
One thing they cannot control is the economic environment they have to work in. If the economy falters, the impact of not being able to make a favorable return on investment of premiums will affect how the company can meet income needs in order to maintain profitability. If a company’s minimum expense requires 25% of every dollar collected, and the loss ratio reached 75%, it wouldn’t take long for Dept of Insurance to step in and start asking some real hard questions about the future solvency of the company.
In this example, if the return on investments was a healthy 12% and that were to be cut in half, other cost saving factors would have to make up the difference. This is where salaries become subject to discussion and even more than salaries, sales force commissions become fair game for debate. We’ll explore that in another blog!