While the author of this treatise was watching TV, an advertisement came on where an insurance company trotted out a lady carrying her cup of coffee with her back to a backdrop of the Statue of Liberty. She began to sarcastically describe how you destroyed your car and how your insurance company is now going to reimburse you only 2/3 of the value of your car. Then as she begins to walk away she makes some off handed remark, your insurance company must think you can drive around on three wheels. This company in the fine print of the ad states they can save you $782 a year on an average.
Shortly after this came another ad showing a cardboard box with two eyes and a mouth dressed in a winter coat with an ice ax in his hand attempting to climb a snow-covered peak. Fighting bravely against the wind the little box describes how you can save so much money with his company. Brave little soul. A whopping $600+ savings is found in their small print.
Other advertisements using animated animals swaggering around or peculiarly dressed humans with big red lips or a helmeted moustached little soldier boy parading around–or the one that takes the cake is the night robed fellow who is caught by his wife in the middle of the night talking on the phone with someone who appears to have enticed him into some illicit activity. Bad form, Smed! All suggesting they can save you time or money if you will just insure with them.
I get it that in the world of advertisement the weirder or stupider someone appears the more likely they will catch your eye and hold your attention while they propagandize you with their sales pitch–go online and in less than fifteen minutes save 10% or better on your insurance premium–come on board and get an anonymous rate quote while saving you some time. Don’t worry about the magnitude of the decision you are about to make with your insurance purchase.
Being a little more than skeptical, I checked on the amount of premium I am paying on a 2010 Chevy Traverse and found I would be paid $44/year by the insurance company who was going to save me $782 to switch to them! Of course, I have no idea what I am comparing my premium to; nevertheless, they were pretty authoritative in their claim. Next time I see their ad I hope to be able to read the disclaimers on how they can do that and stay in business.
I should be reasonable in my satire because there can be a great deal of swing in insurance premiums from company to company and from auto to auto, but come on folks, let’s be real in our conversations with each other. Somehow there needs to be an adult in the room when you are talking about one of the biggest outlays in money over your lifetime in the form of premiums paid. Having a little fun isn’t bad, but decision to purchase shouldn’t be based on some catchy tone or jangling advertisement. Having had my fun with advertising gimmicks, how do insurance companies calculate the premium they are going to charge?
Premium Calculations
Insurance companies are regulated by a state insurance commissioner who has the fiduciary responsibility of making sure insurance carriers are financially sound and can handle potential claims in the future. These companies are either domestic (incorporated within the state they are doing business) or foreign (incorporated in another state but recognized to do business in state in question). The distinction determines in part how premiums are taxed. Domestic companies have some advantages in this regard. One of the most critical responsibilities of the insurance commissioner is to oversee the solvency of an insurance company so the company can deliver on the promises made in its contract with the buying public. No small task!
Most companies have an actuarial department which is charged with taking all the circumstances which will affect the solvency of the company to determine premiums. Among these, but probably not limited to, are projections of future claims, claims incurred but not yet reported, present claims, projected rate of return on investments, administrative expenses, operating expenses, employee retirement funding, advertisement, reserves required by State regulations, competitiveness compared to others, etc. Once these calculations are made and the company feels comfortable with the projections, they are taken to the appropriate State Department of Insurance for review. When the Department of Insurance gives its stamp of approval, the insurance company can begin using those rates.
It is easy to see the value of a very competent actuarial department.The actuarial realm of an insurance company is the sacred temple of insurance. A company’s very existence is in the hands of those who are making these premium calculations. Get it reasonably right and the company survives–get it wrong and good bye to that company. Not many CEO’s question what their actuarial departments are saying to them.
(Updated 2/20/2018)
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