January 19, 2011

Why Some States Outlaw Car Insurance Discounts From Insurance Providers

In the cutthroat competitive world of car insurance, one might expect discounts to be extensively offered. While shopping around for the best rate is expected, most states have strict rules prohibiting illegal discounts from being offered. Car insurance providers operate under different rules and conditions compared to most businesses and many types of behavior are considered illegal for agents to engage in.

Car insurance providers offer coverage as allowed by state laws. The industry is usually overseen by a state insurance commissioner whose office regulates the industry and fines those who do not comply with the law. One of the most common infractions is illegal discounts provided to customers. Discounts are closely regulated and in many states prohibited to avoid abuses by agents. Insurance agents must be licensed and are closely monitored by their state insurance commission, which demands ethical behavior and following rules of conduct.

The main reason for strict control is the state insurance commissions have to insure each insurance company offering policies in the state maintain a healthy financial condition which can pay out all claims. If a car insurance provider cannot meet its obligations, the state has to act to guarantee coverage, usually by tapping into a fund generated by fees on policies written by all providers. Therefore the state insurance commissioner has to oversee the rates charged by each insurer in order to insure the amounts charged are sufficient for their operations.

Rebates or policy price reductions due to an agent sharing some or all of the commission generated by writing policies are the main form of banned illegal discounts. Commissions may only be paid to licensed insurance agents so an agent cannot return any commission, gifts or prize to clients in exchange for buying a policy, nor may they promise future discounts or rate reductions.

There are some discounts offered by the insurance companies and regulated by the states which an agent can extend to customers. The most common are multiple policy discounts. For example, car insurance providers can give a fixed percentage discount on the rate for each car in a policy where multiple cars are covered or the insurance buyer also obtains homeowner insurance.

Insurance laws in many states prevent car insurance providers from being too aggressive in pricing their policies and this expectation carries over to agents in laws preventing illegal discounts. While rates do matter in the buying decision, customers have to balance different factors and rates in order to best to approach insurance buying. The best insurance offering may not be the lowest price, but the one which covers all the insurance needs of the buyer together with good customer service.