Insurance is one of those things in life that few people really understand. All they know is that they have to pay for something they hope they never use. The only time insurance is really appreciated is when it saves the day after a loss or accident.
Understanding how insurance companies view their job makes understanding insurance rates much easier.
Shared risk is the concept behind all insurance. Companies that offer insurance operate on a simple principle. They believe that the same loss is not going to occur for everyone in a group of insured customers at the same time.
Complex mathematical tables are used to calculate the risks associated with anything that is insured. Whether it is lives, cars or houses, the insurance companies calculate probable losses on a certain type of insurance.
They then calculate rates to charge that cover that risk and allow a profit. The individual buying that insurance is sharing the risk of loss with all the other people in the group.
The most important thing an insurance company does is evaluate risk. The more control they have over the risk of loss, the lower the rates they can charge.
Auto Insurance and Competition
Anyone that has watched TV or been on the Internet has noticed the tremendous amount of advertising for automobile insurance. The Internet has greatly changed the world of auto insurance.
Until a few years ago, agents sold almost all insurance directly to customers. The process of comparing prices between companies wasn’t easy. Internet comparison sites like Kanetix have changed that process. There is a great deal of focus on price for auto insurance, and less attention is paid to service.
States require only minimal insurance liability coverage. That means there is a big spread between basic auto insurance and a reasonable level of coverage with various options added to the policy.
To compete, larger multi-line insurance companies have started a practice called bundling.
Why Bundling Works for the Insurer and the Insured
The issue of risk is at the core of the approach to bundling. Large insurance companies with field service agents have business models that work best with long term customers paying year after year.
A large cost to these companies is processing and evaluating new customers. This is called underwriting expense. Lower customer turnover substantially lowers underwriting expenses.
Insurance company numbers also tell them that homeowners are a lower risk to insure than people chasing the lowest price every six months. There also administrative savings when one customer is serviced over several lines of insurance.
This all translates to stable customers, lower costs and lower risks.
These factors allow companies to offer substantial savings to their customers on combined, or bundled, products.
Competing with Price Only Companies
A final factor in lower insurance prices for bundled coverage is a marketing decision by the larger companies. They know they can’t compete with stripped down quotes from companies selling only price, not service.
By combining policies, they eliminate part of what is called pricing transparency. In other words, you are not comparing apples to apples. The larger companies can accept less profit on auto insurance in the hopes of selling life, homeowners, boat and other insurance to a long-term customer.
Is Bundling a Smart Choice?
Choosing the option of bundling takes a little more effort to know what you are actually paying for car insurance. In most cases, it is a good decision for those already paying for other lines of insurance, and can cave you quite a bit of money overall.