When it comes to pricing and deciding whether to retain a policyholder, claims play an essential role for underwriters. Car insurance companies consider not only significant losses but also the number and frequency of claims. If a policyholder has a high number of claims, even if they are minor or not their fault, it indicates a susceptibility to accidents. Consequently, insurers may choose to send a non-renewal notice at the end of the policy term. The occurrence of multiple accidents may take precedence over the details of each individual claim. This means that insurers prioritize the fact that accidents are happening rather than the specific circumstances of each incident. As a result, when making renewal decisions, vehicle insurers may choose to retain or drop a policyholder based on the frequency of accidents.
Typically, when car insurers receive claims, their initial response is to raise premiums from next renewal, depending on its type and size. If policyholders decide to renew their policies despite the increased rates and continue to experience insurance losses, the next course of action for insurers may be to terminate the policy contract at the next renewal. The primary reason for offering policies with a predetermined end date is to enable companies to make necessary adjustments to their pricing or eliminate high-risks from their portfolios.
Every insurer has a certain degree of flexibility in determining what risks they consider unacceptable and how to handle them. However, car insurers are obligated to send non-renewal notices and they typically provide explanations for their decisions. Most states have regulations in place to determine the circumstances under which insurance companies can cancel an active policy. However, when it comes to non-renewals in auto insurance, states tend to have fewer restrictions since the policy has reached its natural expiration.
Significance of Small Claims
If a policyholder experiences multiple minor accidents within a brief period, it is often seen as an indication that a more significant incident may occur in the future. This deduction leads insurers to make a business decision to terminate such policyholders at renewals before they potentially file a larger claim. Additionally, smaller claims also incur costs for insurance companies. The sheer number of these claims, along with administrative and adjuster expenses, can accumulate and impact the overall financial burden for insurers.
Auto insurance policies may be non-renewed when there is a combination of traffic violation tickets and claims or purely for high number of claims. Vehicle insurance companies typically offer 6-month policy terms to allow themselves flexibility in responding to indications of increased risk. At renewals, they can adjust prices accordingly or choose to discontinue coverage for policyholders deemed higher risk. Some insurers may opt to raise premiums as a means to either discourage such risks or ensure proper compensation if the policyholder decides to continue with the policy. The shorter policy terms provide insurers with the ability to adapt to evolving risk factors and make appropriate decisions regarding pricing and policy retention.
Automobile insurance underwriters and actuaries work hard to identify and price risks. The company’s success often relies on these key skills, which include predicting future claims and losses and avoiding them before they happen. That is why they are not only concerned with pricing risks but also insurability and their defence mechanism for excessive risks is non-renewal.
Vehicle insurance companies face a challenge when it comes to increasing premiums for all policyholders due to a high number of claims. Implementing such a blanket increase could potentially result in the loss of lower-risk policyholders to competitors, creating an imbalance with an excessive concentration of high-risk drivers. To avoid this situation, insurers need to proactively identify policyholders who are more likely to generate losses for the company. By taking defensive actions, such as non-renewal of car insurance policies, they can mitigate the impact of potential losses and maintain a balanced risk portfolio.
To assess the likelihood of future losses, one of the most reliable indicators used by insurers is the policyholder’s involvement in accidents. They carefully examine the number, frequency, and fault in these accidents, as any of these indicators alone can be sufficient for underwriters to deem the risks too high for their preference. It’s important to note that each car insurance company may have a different approach and outcome in such cases, and thus, non-renewal of policies may not necessarily pose a significant problem for drivers, as alternative coverage options can often be found elsewhere.