Thursday, April 8, 2010
How High Gas Prices Can Lead to Lower Auto Insurance Rates
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If all of our neighbors would just drive even less, we'd get lower auto insurance rates.
And that could be in the process of happening. When Americans spend less time on the road, the frequency of auto accidents declines. And when auto accidents go down, so do claims on auto insurance. That gets the ball rolling: When auto insurance companies see their costs on claims declining steadily, they typically respond to market conditions by lowering their auto insurance quotes and, ultimately auto insurance rates in a bid to stay competitive. And voila!, we write smaller checks for our auto insurance premiums.
With run-away gas prices, Americans are already driving less. The Federal Highway Administration (FHWA) reported in May 2008 that Americans are driving at "historic lows." The estimated "vehicle miles traveled," or VMT, for March 2008 fell 4.3 percent compared to March 2007, making it the sharpest dip for any month since the FHWA began tracking traffic-volume trends in 1942. Want to follow driving trends? The FHWA publishes monthly "Traffic Volume Trends."
When auto accident claims go down, auto insurance companies can usually respond fairly quickly. To adjust premiums, they must file new auto insurance rates with every state in which they operate. They can file new auto insurance rates any time they want to respond to market conditions, and many states offer a "file and use" system, where auto insurance companies can file new auto insurance rates and begin using them immediately without prior approval from the state insurance department. Some states even have a "use and file" system, so insurers can implement new auto insurance rates and then officially file them shortly thereafter. This way auto insurance companies can begin passing on savings (or increases) right away.
The nation's largest auto insurance companies are the first to see trends in accidents and claims payments due to the sheer volume of their claims data. For example, State Farm, the nation's largest auto insurance company, handles about 19 million auto insurance claims a year (that's a little over 17 claims per minute, all day, every day).
Robert Passmore, Director of Personal Lines for Property Casualty Insurers Association of America (PCIAA), an industry trade group, says, "This is where you see competition kick in." He notes that if you live in a state that requires "prior approval," it would take a longer time to see rate reductions. That means Californians and New Yorkers could be tapping their toes waiting for auto insurance rate reductions while everyone else pockets savings.
Auto insurance companies also note that auto insurance rates have been holding steady or declining over the past few years anyway. For example, State Farm customers in all states have seen rate reductions between Jan. 1, 2004, and Dec. 31, 2007, and customers in 39 of those states saw double-digit percentage rate decreases. (State Farm policyholders in New Jersey got the biggest drop of 29.19 percent.)
Passmore cautions that other factors could offset the trend in reduced driving specifically, medical costs from bodily injury claims, legal costs relating to claims disputes and repair costs that are, for now, rising faster than the rate at which auto accident claims are going down.
Darn those repair, medical and legal costs! If it weren't for those, drivers could already be seeing lower auto insurance rates (as we sit at home). However, auto insurance companies generally agree that if we see significant auto accident reductions, lower auto insurance rates won't be too far behind.
Perhaps at the $6-a-gallon mark?
Will reduced driving mean lower auto insurance rates?
Insure.com asked the nation's top auto insurance companies whether high gas prices and reduced driving are translating to lower auto insurance rates yet. Here are their answers.
State Farm spokesperson Dick Luedke notes that State Farm auto insurance rates have been on the decline nationwide since 2004, but reduced auto accident claims are not yet leading directly to further auto insurance rate reductions: "Our actuaries look at claims data not just to see the recent past, but also to see what might change the future, like gas prices."
Luedke says there's no hard and fast rule as to what level of auto accident reduction would spark lower auto insurance rates, but says, "If we saw a reduction as big as 10 percent in accident frequency, we would have reacted long before that."
Allstate spokesperson Kate Hollcraft says, "We have just recently seen a decline in automobile claim frequency and if this continues through the summer months, we would probably be able to attribute it to a rise in fuel costs."
Progressive spokesperson Leah Knapp says, "We don't speculate about future rate changes, but it would be accurate to say that we continuously review market and business conditions, including monitoring losses, so that we can ensure our policies are accurately priced everywhere we do business. When our analysis suggests our rates require adjustment, we may seek to either raise or lower rates accordingly."
Nationwide Vice President & Policyholder, Standard Auto Product & Pricing, Larry Thursby, observes that "customers are having fewer accidents." But he notes it's been that way for a couple of years due to a variety of factors, like an aging population that becomes safer drivers, graduated licensing laws for teens and crackdowns in drunk driving. In addition, potential auto insurance rate reductions due to accident frequency are being offset by inflation in the usual suspects: medical and hospital costs, repair costs and legal costs.
Thursby says that Nationwide has been passing along cost savings by offering guaranteed renewability, lower surcharges and broader "forgiveness" for accidents, fender-benders and minor violations.
Amy Danise - About the Author:
Amy Danise is an editor for Insure.com. Visit Insure.com for a comprehensive array of comparative auto, life and health quotes, including a vast library of originally authored insurance articles and decision-making tools that are not available from any other single source. Insure.com is dedicated to providing impartial insurance information to consumers. Visitors can obtain instant insurance quotes from more than 200 leading insurers, achieve maximum savings and have the freedom to buy from any company shown.
And that could be in the process of happening. When Americans spend less time on the road, the frequency of auto accidents declines. And when auto accidents go down, so do claims on auto insurance. That gets the ball rolling: When auto insurance companies see their costs on claims declining steadily, they typically respond to market conditions by lowering their auto insurance quotes and, ultimately auto insurance rates in a bid to stay competitive. And voila!, we write smaller checks for our auto insurance premiums.
With run-away gas prices, Americans are already driving less. The Federal Highway Administration (FHWA) reported in May 2008 that Americans are driving at "historic lows." The estimated "vehicle miles traveled," or VMT, for March 2008 fell 4.3 percent compared to March 2007, making it the sharpest dip for any month since the FHWA began tracking traffic-volume trends in 1942. Want to follow driving trends? The FHWA publishes monthly "Traffic Volume Trends."
When auto accident claims go down, auto insurance companies can usually respond fairly quickly. To adjust premiums, they must file new auto insurance rates with every state in which they operate. They can file new auto insurance rates any time they want to respond to market conditions, and many states offer a "file and use" system, where auto insurance companies can file new auto insurance rates and begin using them immediately without prior approval from the state insurance department. Some states even have a "use and file" system, so insurers can implement new auto insurance rates and then officially file them shortly thereafter. This way auto insurance companies can begin passing on savings (or increases) right away.
The nation's largest auto insurance companies are the first to see trends in accidents and claims payments due to the sheer volume of their claims data. For example, State Farm, the nation's largest auto insurance company, handles about 19 million auto insurance claims a year (that's a little over 17 claims per minute, all day, every day).
Robert Passmore, Director of Personal Lines for Property Casualty Insurers Association of America (PCIAA), an industry trade group, says, "This is where you see competition kick in." He notes that if you live in a state that requires "prior approval," it would take a longer time to see rate reductions. That means Californians and New Yorkers could be tapping their toes waiting for auto insurance rate reductions while everyone else pockets savings.
Auto insurance companies also note that auto insurance rates have been holding steady or declining over the past few years anyway. For example, State Farm customers in all states have seen rate reductions between Jan. 1, 2004, and Dec. 31, 2007, and customers in 39 of those states saw double-digit percentage rate decreases. (State Farm policyholders in New Jersey got the biggest drop of 29.19 percent.)
Passmore cautions that other factors could offset the trend in reduced driving specifically, medical costs from bodily injury claims, legal costs relating to claims disputes and repair costs that are, for now, rising faster than the rate at which auto accident claims are going down.
Darn those repair, medical and legal costs! If it weren't for those, drivers could already be seeing lower auto insurance rates (as we sit at home). However, auto insurance companies generally agree that if we see significant auto accident reductions, lower auto insurance rates won't be too far behind.
Perhaps at the $6-a-gallon mark?
Will reduced driving mean lower auto insurance rates?
Insure.com asked the nation's top auto insurance companies whether high gas prices and reduced driving are translating to lower auto insurance rates yet. Here are their answers.
State Farm spokesperson Dick Luedke notes that State Farm auto insurance rates have been on the decline nationwide since 2004, but reduced auto accident claims are not yet leading directly to further auto insurance rate reductions: "Our actuaries look at claims data not just to see the recent past, but also to see what might change the future, like gas prices."
Luedke says there's no hard and fast rule as to what level of auto accident reduction would spark lower auto insurance rates, but says, "If we saw a reduction as big as 10 percent in accident frequency, we would have reacted long before that."
Allstate spokesperson Kate Hollcraft says, "We have just recently seen a decline in automobile claim frequency and if this continues through the summer months, we would probably be able to attribute it to a rise in fuel costs."
Progressive spokesperson Leah Knapp says, "We don't speculate about future rate changes, but it would be accurate to say that we continuously review market and business conditions, including monitoring losses, so that we can ensure our policies are accurately priced everywhere we do business. When our analysis suggests our rates require adjustment, we may seek to either raise or lower rates accordingly."
Nationwide Vice President & Policyholder, Standard Auto Product & Pricing, Larry Thursby, observes that "customers are having fewer accidents." But he notes it's been that way for a couple of years due to a variety of factors, like an aging population that becomes safer drivers, graduated licensing laws for teens and crackdowns in drunk driving. In addition, potential auto insurance rate reductions due to accident frequency are being offset by inflation in the usual suspects: medical and hospital costs, repair costs and legal costs.
Thursby says that Nationwide has been passing along cost savings by offering guaranteed renewability, lower surcharges and broader "forgiveness" for accidents, fender-benders and minor violations.
Amy Danise - About the Author:
Amy Danise is an editor for Insure.com. Visit Insure.com for a comprehensive array of comparative auto, life and health quotes, including a vast library of originally authored insurance articles and decision-making tools that are not available from any other single source. Insure.com is dedicated to providing impartial insurance information to consumers. Visitors can obtain instant insurance quotes from more than 200 leading insurers, achieve maximum savings and have the freedom to buy from any company shown.
Labels: high gas insurance rates, insurance rates, lower auto insurance rates
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Tuesday, April 6, 2010
Methods for Determining Insurance Rates
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The price of insurance depends ultimately on the risk the insurer is taking on on behalf of the customer. Simply put, this will depend on the chance of the insured event occurring, and the likely cost of the outcome. The way insurers calculate this risk, and quantify the amount of the premium, is through the use of what is known as actuarial science. Using certain probability and statistical mathematical models, the insurance company can predict with a fair degree of accuracy, the approximate cost of future claims.
For example, supposing a someone wishes to insure their $100,000 home against fire. For argument's sake, lets assume that 1 in a 1000 homes in this area burn down every year. This would mean that just to break even, on the mathematical model,the insurance company would have to charge $100 a year for the premium. What the insurance company will in fact do is charge something more than $100, say $120. This extra $20 will cover the overhead costs of the insurance company's operation. It will also cover an amount for profit of the insurance company. The only other way the insurance company generates profits is by investing all the policy premiums it is paid. That way, all the premiums earn interest, or investment returns, while they are in the possession ofthe insurance company. While this method represents a significant income for the insurance company, the majority of insurance company's funds do actually come from the payment of premiums.
It has been argued that those who pay premiums and do not have to make a claim lose out by effectively wasting their unused premium. In this sense, the insurance industry can not be held to produce any net gain for society, and therefore, the huge profits they generate are unwarranted. Defenders of insurance companies however claim that the peace of mind they offer to all their customers is a significant societal benefit which they provide. Simply knowing that you will be compensated if disaster strikes you is worth something to people, even if the disaster never strikes.
The funds the insurance company holds, from premiums that have not been claimed for payouts, is called its float. Massive profits can be generated from the float alone. While losses are just as possible as gains with all investments, the profits made from insurance company floats, for the five years ending 2003, was $68.4 billion. In the same period, insurance companies paid out $142.3 billion in insurance claims. Some do not believe that the insurance industry will be able to sustain itself for ever on profits generated by the float and so predict large premium rises for the future.
Article Source:
For example, supposing a someone wishes to insure their $100,000 home against fire. For argument's sake, lets assume that 1 in a 1000 homes in this area burn down every year. This would mean that just to break even, on the mathematical model,the insurance company would have to charge $100 a year for the premium. What the insurance company will in fact do is charge something more than $100, say $120. This extra $20 will cover the overhead costs of the insurance company's operation. It will also cover an amount for profit of the insurance company. The only other way the insurance company generates profits is by investing all the policy premiums it is paid. That way, all the premiums earn interest, or investment returns, while they are in the possession ofthe insurance company. While this method represents a significant income for the insurance company, the majority of insurance company's funds do actually come from the payment of premiums.
It has been argued that those who pay premiums and do not have to make a claim lose out by effectively wasting their unused premium. In this sense, the insurance industry can not be held to produce any net gain for society, and therefore, the huge profits they generate are unwarranted. Defenders of insurance companies however claim that the peace of mind they offer to all their customers is a significant societal benefit which they provide. Simply knowing that you will be compensated if disaster strikes you is worth something to people, even if the disaster never strikes.
The funds the insurance company holds, from premiums that have not been claimed for payouts, is called its float. Massive profits can be generated from the float alone. While losses are just as possible as gains with all investments, the profits made from insurance company floats, for the five years ending 2003, was $68.4 billion. In the same period, insurance companies paid out $142.3 billion in insurance claims. Some do not believe that the insurance industry will be able to sustain itself for ever on profits generated by the float and so predict large premium rises for the future.
Article Source:
Labels: determine insurance rates, insurance rates, methods for insurance rates
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