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UPDATED: Mar 13, 2020
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When comparing insurance companies, the question often arises about how insurance companies make a profit. People want to know and understand the process of insurance and for good reason. It’s understandable that consumers want to know where their money is going when they pay their premiums each month.
It’s also good to know how an insurance company’s financial situation is compared to other insurers. A sound insurance company has plenty of reserve on hand that they can pull from anytime they need it. If their financial reserve is strong, they don’t have to worry about being able to pay their claims.
An insurance company’s stability regarding being able to pay claims is one of the most basic requirements they have to meet to pass inspection.
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How an Insurer Measures Loss and Profit
The reason some insurance companies do not enjoy as much profit as they would like is due to their profit-to-loss margins. This is calculated by dividing the total incurred losses by the total insurance premiums. The lower the ratio, the more profitable the insurance company is.
Insurance companies make money from insurance premiums. This is why your insurance goes up after you have an accident.
Even if you never have another one, one accident could cost an insurance company thousands of dollars in loss. Therefore, they have to make up for this loss somehow. This is done by raising premiums of everyone within the insurance company’s customer base.
Sometimes the premium rates may only affect a particular high-risk group, such as teenage drivers, who have the highest risk rate of any age group, including older drivers.
Many hold a stereotype that senior drivers are some of the worst and most dangerous, but the evidence just does not support this. Senior drivers tend to drive more slowly and are more cautious when driving.
Younger drivers, on the other hand, are often driving fast, more recklessly, and engage in DUI more often than their senior counterparts. These factors and others contribute to the real statistic that young male drivers between 18 and 24 are the highest risk group for driving today.
When it comes to men and women drivers, the old jokes about women drivers just don’t stick anymore. That’s because insurance statistics have revealed that men account for a much higher percentage of accidents and mishaps than do women.
This list includes:
- Reckless driving
- Serious accidents
Insurance companies must take all of these statistics into consideration when raising or planning insurance premium rates. Individual rates will come up when you have an accident, but you may also see rates fluctuate throughout the year on your policy even if you do not have an accident. That’s because accidents that occur among other members of the policy influence the rates when they experience traffic violations or wrecks.
The profit an insurance company makes is based solely on their profit-to-loss ratios. If the number of accidents remains relatively low and premiums are priced high enough to level out the loss; the insurance company will make a profit.
If, however, their loss is too heavy and the premiums are not high enough, they will suffer financial distress and in some cases, financial disaster.
Sudden Loss Due to Multiple Claims
There have been some rare but extreme examples of insurance companies that covered a flood area or storm-ravaged site to cover damaged property and housing that broke the company over one event. While this is possible in a highly-ravaged area of damage for property or flood insurance, it rarely will happen with car insurance. That’s because it’s impossible for so many accidents to occur simultaneously that it would break a car insurance company.
The Best Way to Keep Your Premiums Down
Now that you know that the primary reason insurance rates go up are because of multiple accidents or large claims, you can help keep the premiums down for everyone by driving carefully and keeping traffic violations to a minimum. Even speeding tickets can raise your premiums. Remember as you drive that anything that you do that raises the risk of loss to the insurance company can raise your premiums.
With this in mind, follow these tips to keep your premiums at bay.
- Obey all traffic signs and watch traffic violations – Any failure to yield, running a stoplight, or failure to come to a complete stop are considered traffic violations. If you are caught, you could face stiff fines, and you may receive points on your driving record. This can add up to increased premiums.
- Don’t be distracted while driving – Using a cellphone to talk or text while driving can create a hazard for yourself as well as other drivers. Pay attention to the road at all times and avoid any behavior that takes your attention away from the road.
- Avoid drinking and driving – DUIs account for a large percentage of fatal accidents each year. They are the number one cause of fatal accidents nationwide. One DUI can be considered a felony and can raise your insurance rates significantly. If anyone is killed or injured, you can even lose your license.
- Keep your speed to the minimum – By keeping your speed to the minimum driving limit, you are cutting your risk in half for a fatal accident. Driving slower is usually the safest way to ensure that you do not have a bad accident. You should always watch out for other drivers, though as they may not appreciate your tendency to stay on the safe side
- Take a defensive driving course – You can lower your insurance premiums greatly by taking a defensive driving course.
- See if you qualify for a safe driving discount – Many insurance companies offer you opportunities for a safe driving discount. Ask the online representative if you may qualify.
Insurance companies make their money through premiums. These may fluctuate at times due to accident claims, profit-loss rations, and other factors.
Talk to the online agent and compare policies before committing to a particular policy. The best way that you can keep track of your premiums and keep them low is to drive safely, chose your company carefully, and apply for discounts.
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