April 3, 2011

Understanding The Way In Which Auto Insurance Companies Make Their Money

The insurance industry is enormous in the United States and other Western countries, but many people don't understand the exact mechanism that insurance companies use to make money. Drivers who understand the means by which auto insurance companies make their money can often gain a lot of control over their policies, so here is a look at how auto insurance profit works and how it can affect auto insurance coverage.

The basic principle behind the insurance industry business model is that by charging more for auto insurance coverage than what it pays out in claims, an insurance provider can make profit. For insurance companies, the difficulty is in determining exactly how much will be paid out on average for insurance claims for various types of coverage. To this end, an auto insurance company uses actuarial data to determine which types of drivers and vehicles are at the highest risk of being involved in an auto insurance claim. Car insurance companies use just about every available statistic to make an accurate assessment to this end.

For instance, an insurance company might determine that drivers in a certain zip code report more comprehensive car insurance claims, so the cost of comprehensive car insurance will rise in that area. They may also determine that the cost of doing business in a certain state is higher due to auto insurance law, and this will also result in a rise in premiums for drivers in those areas. Specially trained actuaries are experts in interpreting statistic data and accurately putting this information together in a way that allows the car insurance company to charge more to high-risk drivers. The better that an insurance company is at figuring out the chances of an accident, the higher their auto insurance profit will be. Some auto insurance companies also use other means to supplement their profits; they might invest excess money, especially if the auto insurance company is closely associated with a bank or owned by a bank. However, the main means of profit for any auto insurance provider is through accurate statistic analysis and appropriately priced car insurance.

Drivers can lower their premiums by understanding the methods that car insurance companies use to make their profits. By knowing which risks are most significant, given a driver's history, his location and demographics will make it easier to find cheap auto insurance policies. Drivers that live in high-theft areas can take steps to avoid theft and get discounts, for instance, and drivers who are in statistically dangerous demographics can take safe driving courses. There is no limit to the number of ways in which drivers can decrease their rates once they understand how car insurance companies make profits.