A huge question surfacing lately with the pandemic is “How are my insurance rates going to be affected?”. People are looking for any way they can possibly save money but, this raises some questions about the ramifications of switching your insurance and what goes into the ratings. I wanted to lay out a few factors for you today that can give you some insight as to how an insurance rate is determined and how some of these factors may be affected by the current situation.
A notorious question we get in the insurance industry all the time is “How are my rates determined? I have no accidents or tickets, why am I paying so much?”. The short answer to that is, there is no simple answer. Each insurance carrier has an entire department where people called “actuaries” work, these actuaries are the people who come up with the algorithm that determines your rate based on several different weighted factors. The factors I will talk about today are credit, length of time with current carrier, and prior insurance liability limits. Again, these are just a few factors that are known, but there are many more that we may not ever know about. All these factors and algorithms go into determining what is called your “insurance score”.
The first factor we will discuss is your credit. Some companies are using your credit score to determine how big of a liability you will be. Whether you know it or not most of the time when an insurance quote is done, they perform a “soft hit” on your credit. This would be the equivalent of checking your score on credit karma or one of those apps. It isn’t a hard inquiry and will not necessarily affect your score right away. This can show a company if you have any delinquencies, late payments, large outstanding balances, or bankruptcies. Each carrier can change the weight of this factor daily, monthly, or even by state. If you know your credit has jumped up in the past year or so, it may be time to look at your rates again. If you know your credit is about to fall because you just lost your job due to the pandemic and can’t make certain payments, maybe it is time to look and ensure you have the lowest rate before your score drops.
The second factor being taken into consideration when determining your insurance score is the length of time you have been with your prior insurance carrier. Think about it, if you are looking at a potential client who leaves their company every six months and hops to a new company, the risk of them having an accident and then leaving your company is higher than someone who has been with the same company for 5 years. Here is a good example: If you are with an insurance company for two months and you pay $100 each month for your car insurance then you get into an accident, let’s say this accident cost your insurance company $4000. If you stayed 4 more months until the policy ends (assuming it’s a 6-month policy) you have paid the insurance company $600. If you jump to another company, your old insurance company just lost $3,400 on your policy and possibly more when you factor in commissions paid and other labor costs. This is all to say a couple things. Each year you have been with your insurance company it helps you until you reach 5 years, above this it doesn’t make that big of a difference with most carriers. Companies will incentivize you to stay by giving loyalty discounts, but these can often be outweighed by a better overall price with a new company if you have been somewhere longer than 5 years. People get complacent when they have been somewhere for so long it almost stops them from the “hassle” of looking for new insurance. Therefore, we suggest let someone shop for you!!
The third factor is prior insurance liability limits. While we don’t have as big of an explanation for this factor, we can tell you for sure that the higher your liability limits are on your prior auto insurance policy the more favorable rating you will receive when looking at new policies with different carriers. This is such a heavily weighted factor with some companies that if you have the state minimum liability limits in Georgia (25,000/50,000/25,000) they won’t even write your policy. You can learn more about liability limits and auto coverage here. There is speculation that when you have higher liability limits it may indicate you are more responsible, have more to protect and your driving might reflect that, or that you are willing to pay more for coverage. Although this is all speculation and we don’t know exactly why these might be taken into consideration we can tell you with certainty that having higher liability limits on your prior auto insurance policy will absolutely yield you a lower premium in the future when you are looking around for a new company!
There are many factors that go into your rate and we may never know all of them. Each company is different, and their rating system is the key to their profitability. The three factors we talked about today are things you may not be able to control right now with the pandemic happening. Hopefully this article gives some insight allowing you to decide based on your situation in these trying times. Each of these factors are weighted differently and it doesn’t necessarily hurt to look at rates if you think you are paying too much. We recommend using an independent insurance agent. An independent insurance agent can take your information and shop it with multiple insurance carriers to get a number of different rates back and tell you which is the best. This process is much easier than filling out 10 different quotes on 10 different websites and talking to 10 different agents who all put you in their pipeline and will call you for the next 2 years. Deal with one agent who has access to multiple companies and save yourself the headache. Dealing with one agent also simplifies the process of switching which usually takes 10 minutes and entails a payment and 2 signatures.