Why Auto Insurance Prices Differ Hugely Among Companies

Many motorists are under the impression that rates should be similar across the market because of the the fact that state commissioners check and approve them. However, this post will discuss throughout why the above assumption is totally misleading and clearly demonstrate at the end that car insurance prices can fluctuate widely for so many reasons.

First of all, the impression that there is a tight control and companies have a very little room to manoeuvre isn’t accurate. They may be subject to same scrutiny and operate under the same legal frame but similarities end there. Besides, they are usually pretty free to decide on almost everything. Most commissioners take the view that market will sort itself out and interference won’t work in favor of customers.

How Much a State Can Control Vehicle Insurance Rates

It is important to understand the role of a commissioner in checking participants, supervising, listening to complaints and helping consumers. First of all, rules and practices vary considerably between states as to how much they can involve in rate setting or controlling. Furthermore, they can individually take a different view on their roles. For example, previous one may have been tough on companies that want a bit more money. However, his/her successor may see it as a barrier for new firms to enter into the 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 sources if existing premiums are raised. Therefore, there is no need to step in.

It is important to make the distinction between checking the rates and setting them. Carrier determine own charges and submit for approval. Then, the commissioner checks them for discrimination, legality and fairness. They cannot dictate what should be charged and send instructions to be followed. This would result in mass exodus. Remember that companies pour in substantial sums in a very risky business and they wouldn’t tolerate being told what to do or charge. Commissioners can influence them only up to a point. It is true that they have to stick to them once they submit it. However, they are totally independent when they are setting them.

The fact that insurers are largely free to determine own rates explains why there would be such premium disparities among them working in the same environment and legislative district.

Their concerns are more about the methodology and legality of that methodology. For example, few states don’t allow underwriters use credit history in calculating quotes and commissioners would make sure applicants aren’t profiled according to their credit ratings.

Once more, they will have to follow the state laws as to what discounts they can offer and what risk indicators they can use to raise premiums. For example, qualification requirements cannot be discriminatory. On the other hand, each is totally free as to what percentage discount or surcharge to apply for every category.

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

How Auto Insurance Premiums Are Determined

So, it is clear that usual market rules apply in this sector as well. If they get it wrong and charge too high prices they may not find enough policyholders. On the other hand, they may face large financial losses if they set them too low. So, it is a balancing act like any other business but underwriting requires being good at assessing risks and predicting claims. They look at past performance of applicants as well as statistically significant data relating to weather conditions, traffic accidents, congestion, auto crimes, repair costs and so on.

Usually, risk categories are based on age, gender, location, driving experience, recent claims and traffic tickets. For example, a teenager would be placed in a high risk age group and charged accordingly. Then, the premium is weighted again according to other factors like zip code and type of car you want covered 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 rates and predict possible future claims. If they deem a particular applicant to be less likely to cause any problem they offer discounts. On the contrary, they can also apply surcharges on top of standard rates if they see too many negative factors that worry them like several speeding tickets. Discounts and surcharges are there to reward good qualities and discourage bad.

Why Car Insurance Prices Fluctuate Much Among Companies

There can be considerable differences in the way they prepare policies, coverage content and charge table. In other words, it would not be surprising to see one motorist get as much as 40% lower premium by going to ABC in the example above rather than DEF. 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. Market forces, like customers finding the cheapest quotes for the same coverage and switching, are what should be influencing competition and not strict state regulations.

Here are a few more reasons as to why vehicle insurance prices may vary so much depending on who you talk to;

  1. It may appear to be disparities in the costs but it may actually be due to varying policy coverage and conditions. That is why quite a few people are happy to spend extra for more inclusive coverage.
  2. Each has own operational set up that results in distinctive overheads and this would have to be reflected on end results. In other words, an efficient car insurer is in a better position to be competitive and an inefficient one has no option but pass the costs to customers.
  3. Premiums are mainly based on how underwriters perceive risk and it changes from one to another a lot. Each has its own past claim experience, ways of looking at statistical and other data and assessing risk. There are tens of indicators to consider that it is not surprising to see totally unique conclusion and fluctuating automobile insurance prices as a result.
  4. Companies come up with different profile of a good driver that deserves discounts. If your profile matches with theirs you get most of them. Otherwise, you may have to keep checking until you find the one that considers you as acceptable risk. This is exactly what motorists do when they shop for auto insurance.
  5. Naturally, each firm will have distinctive ownership structure and profit goals that will influence the way they package policies. Furthermore, each would have different views on how they can achieve the goals of reducing exposure and increasing profits.

The bottom line is that each carrier is free to set own charging structure and you are free to choose whichever 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 improving your chances of getting cheap automobile insurance quotes. Why not put this knowledge to test now and see if you can use all these fluctuations to your advantage.