By Ken May
Everybody knows that insurance costs money. Just like going to the grocery store, you buy items that you need or want and pay a price. It’s the same on an insurance policy except that they call it a premium instead of a price. I’m not sure why. It may be because a fancier name enables them to charge more (lol).
Insurance premiums have what is called a “base premium”. If everybody and everything were exactly the same, everybody would pay the same amount. But there are factors that make some policies higher or lower than others such as the type of car you drive, your driving record, where you live, and discounts available on auto insurance policies.
On homeowner’s insurance policies, the cost to replace your house if destroyed, where you live, any upgrades that have been made, and discounts offered by the company all effect the premium you must pay.
I cringe when somebody says “my neighbor told me that he is paying (insert premium) for his insurance. I should be paying the same”! Well, assuming this is an auto policy, what kind of driving record does he have? Is he driving a vehicle that costs less to repair or replace? Does he have the exact same coverage as you? What driver class is he based on his years of driving experience, marital status, and annual miles driven? I won’t even get into homeowner’s questions because I was told that there are 212 rating factors on a typical homeowner’s policy!
It is important to understand that insurance companies are like gamblers (would that make me a dealer?). There are “propeller heads” called actuaries who are really good with numbers (though they may walk outside wearing only one sock) that come up with how much each person should pay in order for the insurance company to make a profit and insure that the state’s Department of Insurance approves the rates. Oh yeah, did I forget to mention that each insurance company must submit their rates and underwriting rules to the Department of Insurance to be scrutinized before being allowed to sell policies? They would be the ultimate “Pit Boss” in the equation.
All of the premiums are put into a pot and after all of the claims have been paid and all of the expenses have been paid, insurance companies will know whether they made a profit or took a loss. If they made a profit, money is set aside for future claims and future years that they take a loss. If they take a loss, they will analyze why they took the loss and try to fix the problem. That means asking the Department of Insurance for approval to make changes to the program or a rate increase. You have likely seen this over the past couple of years where auto rates have increased due to the higher costs involved to replace or repair newer cars which are full of technology. It is still too early to see what impact the recent fires will have on homeowner’s premiums. On a personal note, it drives me nuts when insurance companies overreact to year-end results and raise rates too much one year only to lower rates too much the next year and it becomes a roller coaster ride. I like when companies make subtle but necessary changes and exhibit stability over a long period of time.
What can you do to insure that you are paying a fair premium on your insurance policies?
First, understanding how all of this works is a good step. Saying that a person should simply “shop around” doesn’t quite hit the target. Why? Because you can almost always find a lower premium if you try hard enough. The question is “what do I give up for the lower premium”?
Having a good insurance agent who works hard for you is another great step. A good agent will try to give you proper protection at a fair price with a financially strong company. Many times at the time of purchase, consumers look too much at just price but when they have a claim, the focus suddenly changes to coverage. They may have been happy to ignore the agent and purchase a cheap Parker Brothers policy but get very upset when they don’t have enough coverage at the time of a loss.
A good agent should review your policies, make sound recommendations, be willing to be an advocate for you when necessary, and provide customer service which goes beyond expectations. And, the agent should be willing to guide you through the insurance purchasing process, explain why you should have certain coverage, and answer any questions that you may have in a way that you can understand without using a lot of insurance jargon.
Please contact our office for a review of your auto and/or home insurance and see what we can do for you!