By Josh Anish on December 1st, 2011 in Industry
Car insurance isn’t something a lot of people like to think about. For better or worse, it’s one of those “set it and forget it” accounts in our hectic lives. But it can help to take a few moments from time to time to scrutinize what you’re paying for, and to whom you’re paying it.
With that in mind, let’s take a look at five of the biggest secrets in the car insurance industry.
1) Car insurance companies are basically just banks. Our social contract with banks is that we hand them our money and the only thing we demand in return is our money back, upon request. They are free to invest it all over the world in the meantime. The car insurance industry is similar. Our providers spend thousands of hours figuring out the average payouts to drivers with our profiles, and then charge us a monthly rate. Often times they will seek to merely break even with regard to our payments and their payouts, and can make handsome profits on their investments of our money in the meantime.
2) Policies are usually only six months long to give the carriers additional flexibility. Yes it’s helpful for us, the consumers, to re-asses our policy needs every six months and avoid getting locked into a bad situation. But in a seller’s market policies are relatively short to give the carrier the ability to adjust premiums more often. For example, if you have gotten into an accident and/or earned moving violations, your carrier may decide that the risk of insuring you has gone up -- and will therefore up the cost of your policy. On the other hand, if you have maintained a perfect driving record, your carrier may seek to lower your premiums in order to keep your business.
3) Your credit score is a variable in determining the price of your policy. Credit scores are kind of like SAT scores: no one is really sure exactly what they show, but everyone knows they show something. The industry is fairly opaque on this one but does admit data shows that those with poorer credit score file more claims, hence the higher rates.
4) Education level is an important rating factor. Another cold reality: drivers with college degrees, on average, file fewer claims than do those without degrees. The actuaries at insurance companies have one job and that is to create data points that can accurately predict the risk of insuring someone. Education levels are apparently one of those data points.
5) Pricing varies by state. Policies shouldn’t be compared apples-to-apples across state lines. In other words, don’t lament how much cheaper your policy in Georgia was compared to how much you pay after moving to California. Different states have different laws and taxes when it comes to car insurance -- so when comparison shopping for a rate, control for state of residence to get the most accurate juxtaposition.