March 28, 2011

Why Auto Insurance Companies Sometimes Offer Homeowners Discounts

Auto insurance companies are constantly on the lookout for ways to increase their profit margins and signing up low-risk clients as new policyholders is one way they have of doing this. They use copious amounts of statistical data in their underwriting procedures to determine the relative risk of each policy applicant and to assign premium costs for each policy written. They also incorporate various discounts as a way of rewarding those customers who maintain lower risk profiles. One of these, known as homeowners discounts, is afforded to customers who own their own home, apartment or condo. For the homeowner, this means lower premiums. For the insurer, it means lower risk.

There is, however, more to this particular incentive than the statistical reality that those who own their own dwellings have been determined to be more stable and a better insurance risk than those renting their domiciles. Many companies selling auto insurance also sell homeowners insurance, life insurance, disability insurance and more, and their goal is to capture all your insurance business. This crossover extends both ways. Homeowners who insure their houses with a particular home insurer may be offered discounts on their car insurance, just as auto insurers may extend discounts to homeowners willing to insure their homes through them. The insurance market is a competitive business and any advantage that can be capitalized upon will be utilized.

Statistics are the lifeblood of the insurance industry and insurers collect and study huge amounts of statistical data in order to make their job of risk assessment just as accurate as possible. Auto insurance companies compile statistics in areas as seemingly innocuous as what color of car is involved in the most number of claims. And, when actuarial experts are busy defining the parameters within which insurance underwriters operate when determining the cost of a particular policy, they take all of these various statistics into account.

Here's the bottom line. If you are a homeowner, you are statistically more likely than a renter to be a more stable, lower risk and more responsible driver than if you are a renter. While this is obviously a generalization and not applicable to every renter or every homeowner, the fact remains that, utilizing something called the 'law of large numbers', the generalization can be shown to be true most of the time. This, for insurance companies, is all it takes for them to adjust their ongoing risk models.

All this doesn't mean one should go out and buy a house just to save a few percentage points on their car insurance through homeowners discounts. Auto insurance companies offer lots of different discounts. An astute consumer will take advantage of all that apply.