Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in...

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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Reviewed by Jeffrey Johnson
Insurance Lawyer

UPDATED: Jun 22, 2018

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In a nutshell...

  • Discounts and Surcharges vary greatly from one company to another
  • Insurances coverages selected have an impact on an insurance quote
  • The underwriting process varies between companies
  • Customer service and business model affect the premiums that a company offers
  • The area in which you live can affect your insurance premiums

Shopping for car insurance can be an overwhelming process. The sheer number of options can leave anyone’s head spinning. When comparing quotes many consumers find that the prices and coverage that they are offered varies greatly between insurers.

Insurance companies use various techniques and models to determine the risk of insuring each customer. In order to understand the price that an insurance company presents to you, it is pivotal that you understand what is going on behind the scenes.

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Discounts and Surcharges

Every company offers an array of discounts; however, many discounts are as unique as the companies in this vast and diverse industry.

These discounts can make a huge impact on the price of one quote versus another. Some companies offer good driving discounts or safe driver discounts to customers who have never been involved in an accident.

Other companies require their policyholders to earn discounts for every year that they go without being involved in an accident. There are also discounts for vehicles equipped with certain safety features.

Many insurance companies offer a reduced rate to policyholders who are able to pay their six-month premium in full, and there also companies that only charge a small fee, normally $1-2, for paying monthly premiums.

It’s not unusual for companies to offer customer loyalty discounts or discounts for customers who always pay their bill before the due date. It’s important to remember that one late payment can potentially cause a customer to lose such a discount.

In addition to discounts, some companies also add surcharges for occurrences that deem a driver to be “high risk.” This may include accidents or traffic violations.

Consumers should evaluate whether each quote they receive includes any accident or violation surcharges.

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Coverage Offered

All insurance policies are not created equally. Consumers should read a quote carefully and request an example policy.

Most companies offer an example of what their car insurance policy includes. Looking for the differences between one policy and another can save an individual from a huge headache in the future.

Some insurance policies extend coverage to any driver that the policyholder gives express permission to drive an insured vehicle.

Other policies only cover named drivers within the policy. Shrinking the pool of potential drivers certainly lowers the cost of a particular policy, but the consumer needs to evaluate their needs for other individuals to operate their motor vehicles.

Many companies simply don’t offer certain coverages such as roadside assistance or underinsured motorist coverage.

Companies will attempt to reduce the price of their policy by offering higher deductibles, but it is best to compare prices of policies with coverages that match as closely as possible.

A consumer can then identify the gaps in coverage, and make an informed decision about cost versus need.

The Underwriting Process

Most customers don’t understand the process that occurs after they purchase an insurance policy. Many industries, including banking and insurance, utilize individuals known as underwriters to evaluate the risks associated with insuring a potential client.

Insurance underwriters evaluate many factors when determining how to price an insurance policy.

In the insurance industry underwriters can analyze a policyholder’s credit history, driving record, prior loss history, and previous insurance history to determine the appropriate premium associated with risks.

Before the advent of computers, this process was slow and required a lot of manpower. In today’s world of advanced technology, most of these things can be evaluated instantly with logarithms and pre-calculated thresholds.

Many companies allow their sales agents to do some field underwriting when selling a policy. This allows the person selling the policy to view a limited amount of data to provide a quote that meets the companies standards.

The price of the premium depends largely on how conservative a company is. More risk-adverse companies will charge larger premiums for customers they deem to be higher risk.

This subjective scale of risk evaluation plays a huge role in the diverse quotes that one individual may receive.

One company may charge a higher premium for those who have had an accident in the past five years, while another company may only evaluate accidents that have occurred in the past three years. Those same companies may flip-flop when it comes to another issue, such as traffic violations.

Consumers who are shopping will have to make a judgment call about which company’s underwriting process best fits them as an individual.

Customer Service

Each insurance company runs on a unique business model. These sole purpose of each model is to drive revenue, but each company accomplishes this in different ways. Each company also has a specific part of the market that they are trying to capture.

Many companies still offer local insurance agents that are available to meet face-to-face with clients.

Many consumers feel that this is much more personal than speaking with a new person every time they interact with their insurance company; however, insurance agencies come at a premium cost for insurance companies.

Many traditional business models are moving away from this way of providing customer service.

Younger generations care much less about seeking out a specific individual to answer their insurance questions.

In fact, young people are more and more interested in finding the answers to their questions exclusively through a website or smartphone application.

These options are more cost-effective for insurance companies, but they also lack the personal feel needed to drive customer retention.

No one business model is more effective than another. They do contribute to the variance that we see in insurance prices. Some companies are able to offer more incentives based on the model by which they live and die.

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Geography and The Claims Process

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Claims play a huge role in the prices that an insurance company charges. If a company has a huge loss in a specific geographical location, it’s necessary to recoup that money by increasing insurance premiums.

Once a loss occurs in an area, that location is considered higher risk. Insurance companies have a lot of freedom when it comes to the way they organize their risk zones.

If all other factors were equal, an individual could easily pay more for their insurance premium than their neighbor that lives down the block. Let’s say these two neighbors live in two different risk zones.

The neighbor and all the surrounding vehicles in one risk zone had hail damage two years ago, but the other neighbor’s risk zone has never experienced a catastrophic hail event. The risk zone with the higher amount of damage will pay an overall higher premium rate.

It’s important to remember this when comparing insurance companies. One company may place a consumer in a high-risk zone, while another may have their location zones created in a different way.

There are so many factors that play into how insurance premiums are determined, and we’ve only scratched the surface in this brief article. The combined factors can make or break an insurance company’s ability to compete in a very diverse market.

Consumers should always remember compare as much as possible and keep their eyes open for potential gaps in coverage.

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