Ultimately, insurance is an “odds game.” The cost of auto insurance can be a complete mystery to a person that does not have inside knowledge of standard industry practices. However, many of the factors that are used to determine the price of an insurance policy make sense and are backed by years of research. A person that is looking for low cost car insurance will need to understand these different factors and how they combine to create an insurance quote from an auto insurance company.
How Car Insurance Companies Work
The car insurance companies (the “insurers”) bet that they will earn enough money over the course of your policy to cover any payments they have to make on that policy, plus a profit. If the insurer has to pay out too soon, too much or too often, they end up losing money on the policy. The insurers try to prevent this from happening by building complicated financial models, which calculate the risk that a “loss event” will occur and the cost of that loss using a wide array of factors.
In order to determine a policy’s cost for you, they input your specific personal factors into the model, which generates an expected cost for that insurance policy. Generally speaking, individuals that are considered “high-risk” pay a higher premium (and profit) to the insurance companies. Low risk individuals are offered more affordable car insurance policies.
Keep in mind though that each company “weights” each factor differently, giving rise to cost differences for an identical policy across multiple insurers. Regardless, while weightings may vary, the factors themselves are usually important to all insurers. For a discussion on factors that affect the cost of your insurance policy and steps that you can take to make sure you have the cheapest car insurance policy available to you (without sacrificing quality), read through our discussion of how to “Reduce the Cost of your Car Insurance Policy.”
Additionally, because car insurance companies insure a large group of different individuals each company will have a different “portfolio” of policies. Each portfolio is unique and therefore each portfolio has a unique risk profile. The cost of a policy will vary as each insurance company attempts to “balance” their portfolio, to reduce “portfolio risk” that results from concentrations of risk factors within a portfolio. Insurers attempt to mitigate portfolio risk by diversifying the policies within their portfolio. These balancing activities mean that each company will charge a different rate for the same policy. These modeling, risk management and portfolio balancing activities are all reasons as to why it is so important to compare car insurance quotes periodically (we recommend annually) to ensure that you are receiving the cheapest car insurance pricing.
Common Car Insurance Features
Standard car insurance policies cover a couple of primary liabilities, which include personal injury coverage and property damage coverage. Personal injury is generally required and stated as both an individual amount (i.e. coverage for the driver) and a per person amount (for other people involved in an accident). Personal injury generally covers medical expenses and losses related to personal injury (such as loss of wages). Property damage pertains to damage to a vehicle or multiple vehicles involved in an accident or to other property (in the event that the vehicle collides with a fixed object).
Other common features include uninsured and underinsured motorist coverage. In some states, though not all, this type of coverage is mandatory. This feature provides coverage in the event that the other driver in a multi-vehicle accident does not have sufficient liability coverage to pay your claims. In this instance, the driver-at-fault’s insurance company pays the claim up to that driver’s policy’s limit, after which your insurance pays any remaining claim up to the underinsured or uninsured limit.
Collision coverage pays for coverage in the event that you are involved in a collision with any object (including another vehicle or the earth in the event of a “rollover”). Often times, collision may be combined with property damage coverage. Comprehensive auto insurance covers all manner of loss, from vandalism to theft to fire. If your car is financed, you will typically be required to carry comprehensive coverage up the amount of the financing.
There are many other features that can be added to your insurance policy; in some instances, some of these features are “bundled” with other features to create a more complete policy. For instance, if you purchase comprehensive insurance from some top insurance companies, they may include roadside assistance, towing expense reimbursement, rental expense reimbursement or loss of use coverage within the policy. It is important to understand whether these features are included in a policy quote when comparing car insurance quotes. If they are included in one policy but are not in another, the cost differential between policies may be misleading unless you understand this variance.
The deductible is another important item to understand. This represents the amount of out-of-pocket expense you must pay before you insurance policy begins to pay benefits. For instance, if you are in a minor “fender bender” and your car sustains $1,500 of damage, if you have a $1,000 deductible, you will be required to pay the first $1,000 to have it repaired and the insurance company will pay the remaining $500. Generally speaking, the higher the deductible, the lower the cost of your insurance.
Compare Multiple Car Insurance Quotes
As mentioned, each insurance company calculates cost differently from the next. Therefore, it is important to obtain multiple insurance quotes to ensure that you are receiving the best rate for a specific policy. It may also make sense to change some of the policy features (such as the deductible) to understand how much difference that makes in the cost of a policy across insurance companies.
Enter your zip code, select “Auto Insurance” and click on the “Get Quotes” button to begin the process of obtaining multiple quotes.
Ultimately, insurance is an “odds game.” The cost of auto insurance can be a complete mystery to a person that does not have inside knowledge of standard industry practices. However, many of the factors that are used to determine the price of an insurance policy make sense and are backed by years of research. A person that is looking for low cost car insurance will need to understand these different factors and how they combine to create an insurance quote from an auto insurance company.
How Car Insurance Companies Work
The car insurance companies (the “insurers”) bet that they will earn enough money over the course of your policy to cover any payments they have to make on that policy, plus a profit. If the insurer has to pay out too soon, too much or too often, they end up losing money on the policy. The insurers try to prevent this from happening by building complicated financial models, which calculate the risk that a “loss event” will occur and the cost of that loss using a wide array of factors.
In order to determine a policy’s cost for you, they input your specific personal factors into the model, which generates an expected cost for that insurance policy. Generally speaking, individuals that are considered “high-risk” pay a higher premium (and profit) to the insurance companies. Low risk individuals are offered more affordable car insurance policies.
Keep in mind though that each company “weights” each factor differently, giving rise to cost differences for an identical policy across multiple insurers. Regardless, while weightings may vary, the factors themselves are usually important to all insurers. For a discussion on factors that affect the cost of your insurance policy and steps that you can take to make sure you have the cheapest car insurance policy available to you (without sacrificing quality), read through our discussion of how to “Reduce the Cost of your Car Insurance Policy.”
Additionally, because car insurance companies insure a large group of different individuals each company will have a different “portfolio” of policies. Each portfolio is unique and therefore each portfolio has a unique risk profile. The cost of a policy will vary as each insurance company attempts to “balance” their portfolio, to reduce “portfolio risk” that results from concentrations of risk factors within a portfolio. Insurers attempt to mitigate portfolio risk by diversifying the policies within their portfolio. These balancing activities mean that each company will charge a different rate for the same policy. These modeling, risk management and portfolio balancing activities are all reasons as to why it is so important to compare car insurance quotes periodically (we recommend annually) to ensure that you are receiving the cheapest car insurance pricing.
Common Car Insurance Features
Standard car insurance policies cover a couple of primary liabilities, which include personal injury coverage and property damage coverage. Personal injury is generally required and stated as both an individual amount (i.e. coverage for the driver) and a per person amount (for other people involved in an accident). Personal injury generally covers medical expenses and losses related to personal injury (such as loss of wages). Property damage pertains to damage to a vehicle or multiple vehicles involved in an accident or to other property (in the event that the vehicle collides with a fixed object).
Other common features include uninsured and underinsured motorist coverage. In some states, though not all, this type of coverage is mandatory. This feature provides coverage in the event that the other driver in a multi-vehicle accident does not have sufficient liability coverage to pay your claims. In this instance, the driver-at-fault’s insurance company pays the claim up to that driver’s policy’s limit, after which your insurance pays any remaining claim up to the underinsured or uninsured limit.
Collision coverage pays for coverage in the event that you are involved in a collision with any object (including another vehicle or the earth in the event of a “rollover”). Often times, collision may be combined with property damage coverage. Comprehensive auto insurance covers all manner of loss, from vandalism to theft to fire. If your car is financed, you will typically be required to carry comprehensive coverage up the amount of the financing.
There are many other features that can be added to your insurance policy; in some instances, some of these features are “bundled” with other features to create a more complete policy. For instance, if you purchase comprehensive insurance from some top insurance companies, they may include roadside assistance, towing expense reimbursement, rental expense reimbursement or loss of use coverage within the policy. It is important to understand whether these features are included in a policy quote when comparing car insurance quotes. If they are included in one policy but are not in another, the cost differential between policies may be misleading unless you understand this variance.
The deductible is another important item to understand. This represents the amount of out-of-pocket expense you must pay before you insurance policy begins to pay benefits. For instance, if you are in a minor “fender bender” and your car sustains $1,500 of damage, if you have a $1,000 deductible, you will be required to pay the first $1,000 to have it repaired and the insurance company will pay the remaining $500. Generally speaking, the higher the deductible, the lower the cost of your insurance.
Compare Multiple Car Insurance Quotes
As mentioned, each insurance company calculates cost differently from the next. Therefore, it is important to obtain multiple insurance quotes to ensure that you are receiving the best rate for a specific policy. It may also make sense to change some of the policy features (such as the deductible) to understand how much difference that makes in the cost of a policy across insurance companies.
Enter your zip code, select “Auto Insurance” and click on the “Get Quotes” button to begin the process of obtaining multiple quotes.
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