Auto insurance is a policy bought by car owners to reduce costs of damage associated with getting into a car accident. Instead of paying direct cash, car owners pay annual premiums to the insurance company. This company is responsible for paying all costs associated with a car accident or other vehicle damage.
Insurance is a vital part of many major financial decisions and was around for ages. Benjamin Franklin introduced the first-ever concept of insurance. He formed the first insurance company, Philadelphia contributions, in 1571 to provide fire insurance to houses made of wood.
Auto insurance was around even before Benjamin franklin, but he did suggest coverage for the crop, human life, widows, and orphans. Even though Detroit was known as the motor city, Cleveland and Ohio were the leading states of automobile development. Gilbert J Loomis holds the title of the first person who bought automobile insurance in 1897. From that point onwards, the auto insurance idea started to flourish.
In 1902, the first automotive fire and theft insurance was introduced. In 1912, insurance plans developed, and insurance companies began combining property and coverage for cars into one policy.
Generally, auto and home insurance were practice in china as far back as 3000BC. Merchants sending boats upstream and downstream would insure their commodities, to protect against any damage or being hijacked by pirates. Investors in merchant cities such as Venice and Florence used to combine money and charge premiums. If any such loss occurred, merchants were issues these premiums.
Lloyd’s of London was the first-ever country to manage marine insurance policies in the 1700s. The company had a list of ships along with their respective values and managed customer policies. Surprisingly, marine insurance is still available in modern-day London.
In 1927, Massachusetts passed the first law-making it compulsory to have car insurance. Years later, car insurance was mandatory in each of the 50 states of the United States.
Auto insurance coverage does not matter in what area the vehicle was damaged. For Eg, if a car insured in New York had an accident in Texas, your vehicle will still be covered.
In the mid-90s, the internet revolutionized, with new businesses, services, and industries developed in the online world. Many businesses launched that provided car insurance services online. Moreover, multiple bricks and mortar companies began offering car insurance quotes online.
Today, customers have many choices to buy car insurance online with quality coverage offered at reasonable prices.
Total revenue of car insurance companies per year:
Auto insurance companies are making loads of profits, record-breaking in fact, at the cost of their policyholders. But what may surprise you is how providers are maintaining healthy profits. In 2009, the Wisconsin legislature passed “truth in car insurance” enforcing drivers to have at least $50,000 insurance, if a person dies or gets injured. Truth in auto barred insurance companies in reducing coverage by snatching benefits paid by the policyholder.
In 2011, the republican controlled state canceled all aspects of truth in auto law. Except for the requirement for all drivers to purchase auto insurance. This cancellation helped in restoring minimum coverage levels to 1982 levels. Customers argued that higher coverage would result in premiums rising each year. This gifted soaring profits to insurance companies.
Wisconsin-based American family, the largest home and auto insurance company reported a net income of $360.5 million. This concludes with a 22% increase over 2011. Country-wide, American families had a 4.6% increase in assets bringing the companies value to $17.9 billion.
State Farm, the largest home and car insurer in the United States quadrupled its profits as claims cost declined. They reported a $3.2 billion increase in net income, and their net worth reached $65.4 billion at the end of 2012. Allstate crop, the second-largest auto and home insurance in the US recorded an annual profit of $2.3 billion in 2012. Progressive, the fourth biggest car insurer in the United States had a 9% increase in earned premiums. They went from $1.46 billion in 2011 to $1.59 in 2012.
Insurance companies could save millions of dollars if proper shreds of evidence of accidents are available. As profits soar, legislators should apply taxes on such companies so that the locals can benefit too.
Money making process of auto insurance companies:
Insurance companies make money by gambling on risk. The risk that you won’t die and make sure the insurer payout, or the risk your car won’t burn down or your house won’t be damaged. The concept of the insurance company revenue model is a business deal with a company, individual, or organization. In this deal, the insurer promises to pay a particular amount for an asset lost by the customer, generally by damage or illness.
In return, the insurance company is paid regular payments(monthly or yearly) by the insurer. Payment is decided in the insurance policy agreement covering life, home, auto, travel, business, and valuables.
The insurance contract is void by the insurance company to compensate for any losses to the customer’s assets, in exchange for smaller payments made by the customer to the insurance company. This contract is signed by the company and the insured.
Let us now look at how and why their risk-based revenue has been so profitable. An insurance company needs an internal business model that collects more money than it pays to its customers. To accomplish this, they have based their business model on two pillars- underwriting and investment profits.
- Underwriting income:
It is the profit generated by a customer underwriting activity over some time. The difference between premiums collected and business expenses plus claims paid to insurers is called underwriting income. If a car insurance company can generate positive underwriting income, it is in a stable financial position. It will not be dependent on investment income.
When a policy is agreed between the client and the insurance company, they receive an insurance premium as payment. This is their collected revenue. The costs related to an insurance company are ordinary business costs. The claims paid out to customers when they file for an insurance claim for an accident are also associated with the insurance company. In simple words, the difference between revenue and total expenditure is underwriting income.
There might be slight fluctuations in underwriting income from quarter to quarter. These could be car damages due to natural disasters such as earthquakes, fires, and hurricanes resulting in mega underwriting losses. Hurricane Katrina caused an underwriting loss of 2.8 billion dollars to the insurance industry in the first 9 months of 2005. However, in 2004 the underwriting income was 3.4 billion dollars.
Surviving extreme events, such as earthquakes and tsunamis, underwriting income shows how well an insurance company is performing. If the underwriting income is consistently negative, the insurance company will eventually shut down.
Moreover, this also indicates that their policies are risky, leading to claims paid out very often. Therefore, an insurance company needs to maintain balance. If it is regularly paying out claims more than it is generating underwriting revenue, it can lead to the non-payment of future claims.
- Investment income
Auto insurance companies also make loads of money via investment income. When the insurer pays his/her monthly premium, the insurance company takes the money and invests it into the market, to enhance their revenue. Insurance companies don’t need instant cash to build a project, like an auto or cellphone company; there is more cash to add to the customer’s investment portfolio. As a result, more profits are made by the insurance company.
That is a mega revenue-earning business of the insurance companies. The insurer receives the money from customers in the form of policy payments. It is not necessary to pay off a claim on that policy, and so they utilize the money in earning investment income on Wall Street.
Insurance companies have the right to increase the price of premiums. So they can easily pass any losses onto the clients if they have any. That is why warren buffet, the sage of Omaha, invested heavily in the insurance sector. They bought Geico and opened its insurance firm known as Berkshire Hathaway Reinsurance Group.
Factors affecting car insurance rates:
While applying for insurance, the companies ask for zip codes, because that is how they determine the base rates. If you reside in a populated area, accidents, conjunctions, and insurance claims are frequent. Living in a metro area will make your rates higher than living in rural areas. They can determine the rate of theft, vandalism cases as well as damaging weather from your zip code. All these factors help them in providing you with the ideal insurance policy.
The younger the drivers, the higher are the rates. According to statistical proof, young drivers are immature behind the wheel and are easily distracted. As a result, they are insecure drivers to insure. As you grow older, the rate can drop. Reaching the age of 25 can drop your rate up to 20 %. According to the insurance institute for highway safety, drivers aged from30 to 69 years are less likely to crash. Insurance rates are stable if a person has a clean driving history.
Data shows that men are more likely to crash- especially in the early years of driving when they are known to be immature. The IHHS states that men typically drive more than women and are involved in riskier behavior. Such behavior includes speeding, drunk driving, and not wearing a seatbelt. Moreover, IHHS noted that accidents cause by men were more severe. As a result, males pay higher rates than women. Once they reach their 30s, rates become comparable. However, as drivers age beyond 60, rates for males increase over the females as crash statistics showmen of older age crash more than females.
Married couples are involved in fewer car crashes as compared to singles. Married couples tend to be more active and responsible than single drivers, resulting in lesser accidents. Car insurance rates can drop 5 to 15 percent lower for married couples. Moreover, married couples enjoy discounts when they combine their policies, such as multi-car discounts.
Driving Experience: Experienced drivers are involved in fewer car accidents. Age factor does not matter here as a person can be inexperienced even at the age of 50. Teenagers comprise the majority category of inexperienced drivers. As a result, they have higher rates. Rates are reduced if the young driver has a clean driving record.
Drivers with clean records have lower rates and are also eligible for driver discounts. Drivers involved in accidents or moving violations are a risk for insurance companies, so they have higher rates. A speeding ticket could raise your rate up to 20 %. Major violations such as DUI can increase your rates up to 100 %. Some insurance companies might not provide insurance for multiple traffic violations.
The type of car driven by the customer affects the rates. If cars of the same model are involved in multiple accidents, then rates would be higher. A vehicle with a successful safety test does not determine its rate. Cars with extra safety features are charged higher rates if that feature is expensive.
Use of vehicle:
A vehicle for work purposes will have higher rates than a car used only once a week. Vehicles used for business purposes have higher chances of collisions. As a result, they have higher rates.
An insurance company can determine the insurance rate by determining the length of daily usage. The greater the mileage, the more the risk of accidents. As a result, higher rates are applicable for vehicles with more annual mileage.
Is it worth having cheap auto insurance?
We have to consider some necessary points. Cheap insurance will not cover property damages in an accident. This type of insurance is called “liability-only”. For a person owning a cheap car, it is suitable for him. If the vehicle is expensive, insurance could come in handy.
What is car excess?
This is a fixed amount paid when you are filing a claim. If the excess is $250 and you make a claim for $1000, the insurer will keep $250 and return the remaining $750. When applying for car insurance, an option for excess is provided. The summary is to keep everything in balance. Too low, and premiums will be through the roof. Too high, and you might lose good cash when applying for a claim.
Myths about auto insurance:
- A red car is expensive to insure:
The insurance rate has nothing to do with the color of the car. The color red has is to terms such as danger, but these terms do not affect insurance.
- Insurance can be cancelled any time:
This is probably one of the frightening auto insurance myths. People think that getting into an accident or speeding ticket might lead to the cancellation of insurance. However, this is not the case. Auto insurance companies are barred from doing so unless the agreed term has ended or the client is caught in any fraud.
- Damages caused by the other person will be covered by his insurance:
This isn’t true. Auto insurance is related to the vehicle owned by the person and not the person himself. So if your friend gets into an accident, your auto insurance will be paying for the damages.
- Personal items lost from the vehicle:
Auto insurance companies do not cover valuables lost or damaged in a car. Expensive items such as laptops, phones, or other electronics are covered by the home insurance policies. So whenever your things are damaged or lost, you should file a claim with your home insurance company.
- No-fault auto insurance means not my fault:
It’s wrong. No-fault auto insurance means that you’re in a state where your insurance company will compensate for medical and other expenses. No-fault insurance will not pay for damages caused to the vehicle.