Why Do Car Insurance Prices Differ Between Insurers?

Most state insurance commissioners check and approve the rates applied by each auto insurer licensed in their state. Then, how come there are still huge differences in car insurance prices between companies? Wouldn’t the process of rate approval leave a very little room for each company to charge more? Wouldn’t it mean that each company has to offer same discounts? Why would there be such a price disparity between companies working in the same environment and following the same state insurance legislations? We will try to answer these questions below.

How Much Can State Authorities Control Vehicle Insurance Rates?

It is important to understand the role of state insurance commissioners in checking auto insurance rates applied by each insurer. First of all, laws and practices vary considerably between states as to how much each insurance commissioner can involve in rate setting or controlling rates. Furthermore, each insurance commissioner can take a different view on its role. For example, previous insurance commissioner may have been tough on auto insurance companies that want to increase their rates. However, his/her successor may see it as a barrier for new insurers to enter into state insurance market and take a more liberal view.

Quite a few state insurance departments take the view that consumers are free to shop around and switch to cheaper insurers if their current insurer raised their premiums.

It is important to make the distinction between checking the rates and setting the rates. Each auto insurer determines the rates they are going to charge and submit it to the state insurance commissioner. Then, the insurance commissioner checks the rates set by insurers for fairness, reasonability, discrimination and legality. So, it is totally up to insurers to set their vehicle insurance prices and insurance commissioners can influence those prices only up to a point. It is true that they have to stick to those rates once they submit it. However, they are totally independent when they are setting their rates.

The fact that insurers are largely free to determine their own car insurance rates explains how could there be huge price differences between two insurers in the same state.

Again it is true that commissioners check those rates and come back with any concerns they may have. But they are unlikely to tell any company what auto insurance premium to charge. Their concerns are more about the methodology and legality of that methodology. For example, few states don’t allow insurers use credit history in their premium calculations. So, a commissioner in one of those states would make sure that no insurer in the state uses credit ratings of applicants to determine their rates.

Once more, companies will have to follow state insurance laws as to what discounts they can offer and what risk indicators they can use to raise premiums. For example, no company can discriminate who gets the discounts and who doesn’t. On the other hand, each company is totally free as to how much discounts they offer for each category and how much they increase premiums for each type of risks.

For example, company A offers 20% discounts to motorists with good credit record and company B does not even include this criteria in premium calculations. If you had a very good credit score you would save 20% by going to company A. This availability of choices in the market gives power to consumers.

How Are Car Insurance Premiums Determined?

We have established that each insurer is free to set its own rates in the light of state laws. If they get it wrong and charge too high prices for insuring vehicles they may not find enough policyholders. On the other hand, they may face large financial losses if they set their prices too low. So, it is a balancing act like any other business but insurance business requires being good at assessing risks and predicting claims. Car insurance companies look at past performance of applicants as well as statistically significant data relating to traffic accidents and other claims.

Usually, insurers determine their risk categories based on age, gender, location, driving experience, recent claims and traffic tickets. For example, you may be placed in one of the age groups from teenagers to senior drivers depending on your age and be charged rates that are applicable to that age group. Then, your premium is weighted again according to other factors like your zip code and type of car you want to insure until all the factors are considered.

Determining auto insurance prices may appear to be a very complicated process but computer programs work all these out and can give you a quote in seconds.

They have to look at many factors that affect car insurance rates and predict possible future claims. If they deem a particular applicant to be low risk to make claims they offer discounts to such applicant to lower the standard rates. On the contrary, insurers can apply surcharges on top of their standard rates if they see too many negative factors that worry them like several speeding tickets. Discounts and surcharges are there to reward good risks and discourage bad risk.

Why Do Car Insurance Rates Differ Between Companies?

There can be considerable differences between auto insurance companies in the way they put together their policies, coverage content and premiums charged. In other words, it would not be surprising to see one motorist get as much as 40% lower premium by going to company A in the example above rather than the B. The fact of the matter is that you can only blame yourself if you don’t shop around and stick with a company that is consistently charging more than fair prices to their policyholders. Market forces, like customers finding the cheapest quotes for the same coverage and switching, are what should be influencing auto insurance prices and not the strict state regulations.

Here are a few more reasons as to why car insurance prices may vary so much between companies;

  1. Each company may look to be charging different prices for insuring the same risk but content and conditions of each policy can be different too. That is why quite a few people are happy to pay more and buy more expensive policies.
  2. Each vehicle insurance company has its own operational set up that results in distinctive costs and this would have to be reflected on their premiums. In other words, an efficient insurer is in a better position to be competitive and an inefficiently run carrier has no option but pass the costs to their customers.
  3. Automobile insurance rates are mainly based on how each insurer perceives risk and it changes from company to company. Each firm has its own past claim experience, ways of looking at statistical and other data and assessing risk. There are tens of risk indicators to consider that it is not surprising to see each company to come up with totally unique conclusion. This will shape their view of many risks involved in insuring automobiles and therefore influence prices they charge.
  4. This different view of risks influence the discounts. Each company comes up with different profile of a good driver that deserves discounts. If your profile matches with their profile you get most of the discounts they offer. Otherwise, you may have to keep checking until you find the insurer that considers you as acceptable risk. This is exactly what motorists do when they shop for car insurance.
  5. Naturally, each firm will have distinctive ownership structure and profit goals that will influence the way they determine auto insurance prices. Furthermore, each company would have different views on how they can achieve their goals of reducing risks and increasing profits.

The bottom line is that each insurer is free to set own automobile insurance prices and you are free to choose whichever company you want. It may not be perfect but the idea is to let the market sort itself out over time. You now have a better idea as to how companies determine auto insurance rates and what to do to improve your chances of getting cheap auto insurance quotes.

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