Whoever would have thought a pandemic could affect the premium individuals would be paying for their car insurance premium! The latest buzz isn’t “get the cheapest car insurance” ad but notices coming across the news channels of car insurance companies giving refunds or discounts to drivers who are driving less due to the “stay-at-home” directive issued by government entities.
How are these refunds and discounts able to be offered by insurance companies? At first blush one would express the thought they were paying too much to begin with so this is simply a payback of unearned excess profits. There may be some validity to that thought, but when one considers how premiums are calculated the answer may not be so sinister.
What makes up a premium? Some factors include age and gender of drivers, how far the vehicle is driven to work or school, damageability of the specific type of vehicle, costs of repairs, frequency of loss prescribed to a specific type of vehicle, limits of coverages required, deductibles chosen, driver’s experience factors, highway driving conditions, cash reserves, litigation factors, color of car (no just kidding even though some think drivers of red cars will get into more wrecks or receive more citations), and where you live are a few. One can add into the equation administrative expenses, i.e. advertisement, agent commissions, employee benefits of health insurance, retirement funds, daily overhead of electricity, supplies, etc. to more fully appreciate calculation for premiums.
When all these factors are taken into account, the projection of what premium should be charged is still more an art than a science because actuaries still can’t predict with complete accuracy how each will affect the whole.
The two rate-affecting factors of driving less miles to work and fewer claims did make a difference in the premium model, and what is most surprising is how fast the insurance industry moved in adjusting their rates due to coronavirus pandemic implications. It’s not like the increase in premiums caused by hurricanes, floods, fires, or other natural disasters which insurance companies have notoriously used to raise premiums with these rate increases spread out over the customer’s billing cycle. It just came across the board for adjustment in April and perhaps June or July month’s billings. In any event, what an incredible public relations event for the insurance industry to appear to be such a benevolent giver in taking the windfall of reduced claims expenses and refunding it to consumers.
One could become pessimistic about how much of a financial impact these refunds or discounts will have, but it wouldn’t be fair to go down that road. It is a gesture which ought to be recognized as an attempt by the insurance industry to do something to help alleviate present circumstances.
One thought in response to the California Department of Insurance public announcement that they are going to be watching very closely these refunds and discounts to make sure no one gets discriminated against and will forcefully take action if they feel it necessary: please stay out of it and let the market do its thing. The buying public does not need in this case a government mandated response. Let the consumer act independently of government involvement. They are free to choose who they will do business with, and if a particular company decides to not go with refunds or discounts then caveat venditor–“let the vendor beware!”
Kudos to Allstate for scooping the marketplace with their bold announcement of its 600 million refund to clients.