Why do I need auto insurance?
Why do I need auto insurance?
That depends on the type and amount of coverage you buy. Generally, auto insurance pays garages and body shops to repair damaged autos. It pays hospital and medical expenses of accident victims. Auto insurance pays the wages of people who are disabled -- often for weeks or months -- because of injuries suffered in auto accidents. It pays for court judgments against negligent drivers and the legal fees involved in lawsuits.
The total cost of settling private passenger auto claims in the U.S. in 1989 was approximately $67 billion.
Why does it seem that the insurance premiums rise faster than the cost of living?
Auto insurance premiums increase due to higher costs of providing insurance protection. Insurance pays for, among other things, car repairs, medical costs of injuries and legal fees. These underlying costs of insurance often increase much faster than the cost of living, and in most cases faster than insurance premiums. The chart below compares these costs to the Consumer Price Index (CPI).
The CPI -- the common measure of inflation, or the cost of living -- monitors prices of goods like clothing, electricity, groceries and raw materials. Insurance premiums cover prices of services (like medical care and legal fees) that tend to rise at a much greater pace than most consumer goods.
Why does my premium increase, even if I've never had an accident or ticket?
The basic principle of insurance is that many join together to pay for the losses of the comparatively few. The insurance premiums paid by many go into a pool of money that is redistributed to those unfortunate enough to be involved in accidents or to experience a theft.
Your premiums may go up or down with the total costs of policyholders' claims as a group. And the costs of claims are affected by many factors over which insurance companies have little or no control.
What are some of the factors determining my insurance premium?
Where you live, your age, your driving record and the type of car you drive make a considerable difference in the cost of your auto insurance premium. There are other "hidden" factors, though, that have little to do specifically with you and your personal driving habits. They are:
Medical care costs New auto prices
Does a state-mandated rate rollback work to save consumers money?
History has shown that for most policyholders, legislative or voted-upon rate rollbacks hurt more than they help. When insurance premium prices are cut arbitrarily, insurance companies still must pay for the continually increasing claims costs -- the legal fees, parts prices and medical bills -- with less money. Rollbacks and price freezes ignore the underlying costs of insurance.
Consider this analogy. What would happen if gasoline prices continue to increase, but gas stations were told to sell their products at 20% less than they did last year, and they weren't permitted to raise prices for several months or years? We all might enjoy savings at first, but soon most gas stations would go out of business by selling their product at inadequate prices. Consumers would be left with fewer stations to buy from and longer lines.
The same concept applies to insurance companies that would be driven out of business if legislation prohibits them from charging enough for their products.
Insurance companies have little or no control over these factors.
Should more regulation be placed on the insurance industry?
If more regulation were imposed upon insurance companies, consumers would suffer by paying high and having fewer companies to choose from. Here's why.
Under the federal McCarran-Ferguson Act, states are given the authority to regulate the insurance industry within their state. State regulation costs less to implement and maintain and is closer to the people in making changes or improvements more easily and quickly than federal regulation.
The McCarran-Ferguson Act also partially exempts insurance companies from parts of the federal antitrust laws so they can work together to collect and share data needed for ratemaking.
Some industry critics want to repeal the McCarran-Ferguson Act, arguing that it would be beneficial in lowering rates. Actually, it is likely that repealing the Act would be detrimental to consumers. If it were repealed, the federal government would then regulate the industry -- the same federal government that was unable to save the nation from the costly savings and loan industry disaster.
In addition, it would cause the shut-down of rating bureaus that analyze data, predict future losses and recommend rates for many small and medium-sized insurance companies that have too few resources to develop rates on their own. Many companies would be driven out of business or merge with larger companies. With fewer companies, there would be less natural competition, which could lead to higher prices and fewer coverage innovations.
Why do I pay more for auto insurance than my brother?
Insurance companies consider more than just your driving record. They look at the nine underlying factors already presented and use statistical information gathered over decades to determine the equitable rate to charge for each type of insurance. Also to be fair, people with similar characteristics are grouped together for rating purposes. You may pay more than someone you know because of:
Where you live -- More accidents and car thefts occur in urban areas then in rural areas. Thus, those who live in major metropolitan areas should pay more for their auto insurance than people in rural areas, all other things being equal. This concept is called territorial rating.
Your age and gender -- Young drivers have more accidents than older drivers, and young males have more accidents than young females. Generally, drivers in the 45 to 65-year-old category have the fewest accidents, and, so, are entitled to lower premiums.
Your car -- Its age, size and make. Drivers of small cars are susceptible to more severe injuries and increased number of fatalities in accidents. Full and intermediate-size cars offer more protection, so some insurance companies give substantial discounts on your insurance for these vehicles.
Why does uninsured/underinsured motorists coverage cost so much today?
When it was first developed years ago, uninsured motorists coverage simply paid for the insured's medical bills and lost wages resulting from injuries in an accident caused by an uninsured or underinsured driver. Because most drivers had auto insurance, and because only medical costs and wage losses were being paid, these premiums were very low.
Since then, the situation has changed extensively. Now, in addition to the basic payments for medical bills and lost wages, nearly one half of our total payments for this coverage pay for what is called "pain and suffering." To collect reimbursement for pain and suffering the insured driver hires an attorney to recover damages from his/her own insurance company and above the medical and wage losses.
Today, about 13% of U.S. drivers are uninsured. They also cause one out of every eight serious accidents (NAII Talking Points, Spring 1991). As more drivers go uninsured, or purchase only minimum limits of liability insurance, the problem worsens. There are more uninsured drivers in heavily populated areas where unemployment and traffic density tend to be high. Thus, people who do buy insurance in these areas must pay higher premiums for uninsured motorists coverage.
How do I know if my insurance company is financially strong and stable?
Major insurance companies are "graded" by the A.M. Best Company -- an independent rating firm and recognized industry authority that annually looks at a variety of important factors in evaluating the financial health and operating performance of insurance companies. After close examination, each company is assigned a letter grade, with A+ (superior) being the highest. An A+ rating points out that a company "generally has demonstrated the strongest ability to meet its respective policyholder and other obligations." Anything less than A may indicate the company is having difficulty in one or more areas. Lower ratings indicate weak ability and poor performance.
What are insurance companies doing to control costs?
Insurers have been active in several areas to reduce claims costs, including:
Safety: The insurance industry is largely responsible for getting auto manufacturers to install air bags in vehicles. The industry also supports safety belt laws and finances research for auto safety and crashworthiness. Insurers have long promoted efforts to get drunk drivers off the roads by encouraging enactment of legislation for tough drunk driving laws.
Theft and fraud: Insurance companies have set up, at their own expense, special units to fight theft and fraud, and have helped in drafting model state legislation to combat these problems effectively.
Legal fees: The industry supports the capping of legal fees and alternative, less costly methods of settling claims outside of court. This helps to keep the costs of claims lower.
Aftermarket parts: As already shown, competitive replacement parts keep car repair costs more reasonable, and claims costs down.
What can I do to get a better deal on my auto insurance premium?
There are several things you can do:
Before you buy a car, consult the Highway Loss Data Institute (HLDI) for their "car list" brochure or other sources to find out which cars have the best experience from a claims standpoint. Generally, larger cars are safer and less expensive to insure. The brochure can be ordered by writing to HLDI a P.O. Box 1420, Arlington, Virginia 22210.
Buy a car with automatic restraints and other safety features. Air bags can save an estimated 10,000 lives each year and can prevent more serious injuries than any other single technology in auto history. Antilock brakes, when used correctly, also help in preventing accidents or minimizing damages and injuries. Insurance companies offer generous discounts, and sometimes other benefits, to customers who buy cars with these safety features.
Drive safely. The best insurance premiums go to the best drivers. If you speed, tailgate or have other bad driving habits, your chances of causing an accident go up. Once you establish a poor driving record, you become a high risk and your premiums will increase.
Increase your deductibles. Because smaller claims are costly for insurance companies to settle, you can save money by paying for these losses yourself. Then you need to buy insurance only to cover the larger collision and comprehensive losses (covering such perils as fire, theft, flood and windstorm) that you might not otherwise be able to pay.
For older cars, consider eliminating collision and comprehensive coverage. If your car is older, it may have depreciated in value to the point that you are paying more in premiums than the car is worth. It is essential, however, that you keep your liability coverage and other coverage that may be required in your state.
Ask about discounts, such as those applicable to a good driver, a good student, an auto/home discount and others.