June 1, 2011

Why The Economy Can Affect Car Insurance Costs

Although seemingly different concepts, there is a correlation between economy and car insurance. Car insurance costs are dependent on various social factors and thus, also economic in nature. So when a huge chunk of the population is going through a financial slump, car insurance costs will most likely increase.

The relationship between economy and car insurance is, in simpler terms, another example of the link between supply and demand. During financial difficulties, one of the primary areas where consumers tend to cut back on is their insurance coverage. Although their demand for the product decreases, the damages incurred during accidents is not at all reduced. If people are uninsured in a struggling economy, insurance companies will definitely lose money. This is because car insurance companies will have to resort to charging higher rates in order to provide sufficient coverage for those filing insurance claims after accidents.

When the economy is bad, all businesses are affected. This would mean less capital flow in the car insurance industry. Car insurance providers will then need a stable fund where they can draw money any time accident claims are filed. But if the economy is good, policy investments will more likely be constant, allowing insurers the ability to lower their rates for customers. During tough economic times, the companies will unfortunately pass increasing costs onto customers.

An offshoot of a bad economy is an increase in criminal rates. When times are difficult, car thefts tend to increase. Car insurance companies will then have to pay out these theft claims. In order to afford paying for these stolen vehicles, companies may increase rates for all customers. This is perhaps the only way the company can compensate for the payouts.

Also during a slow economy, people tend to forgo the need to regularly maintain their vehicles. Their priorities begin to change and they cannot help but place car maintenance at the bottom of the list. So instead of having an oil change quarterly, they will choose to have it done twice a year just to be able to save a few more bucks for more important things. However, without proper maintenance for these vehicles, the more likely it is that they will break down. This is again very costly for car insurers since people driving out of shape vehicles are more prone to getting into accidents.

Despite the car insurance companies increasing their rates during a bad economy, they will also strategize in order to attract new customers. This may prompt them to offer additional discounts for customers in order to encourage them to purchase policies. Such discounts will be very good for new and current clients who want nothing but to save more money.