Driving Changes in Auto Insurance
by Maura Keller
Auto insurance rates are on the rise, and you're likely to get hit hardest if you have a less-than-perfect driving record. As if that weren't bad enough, consumers often discover that their auto insurer depreciates their vehicle and leaves them paying more than expected for car repairs. Too often, consumers don't realize the importance of having the right insurance until a loss occurs.
As with most industries, the auto insurance industry is in constant flux—responding to the ebbs and flows of health care, financial markets, and state and federal legislation. To guard against any future policy "surprises," it's important for consumers to be informed about the issues that may affect their auto insurance policies.
What changes is the auto insurance industry facing today that may have a lasting impact on consumers?
"Today's auto insurance industry looks much different from even a few years ago," says Jim Brown, director of
the Center for Consumer Affairs at the University of Wisconsin-Milwaukee and project team member of the Auto
Accident Compensation Project, an information clearinghouse on auto insurance reform. "The industry as a whole is
undergoing some profound changes."
Take State Farm for example. As the largest underwriter in New Jersey, State Farm recently announced that it
was withdrawing from New Jersey. "Historically, New Jersey has been the highest-cost state for insurance," Brown
says. "Twenty-two percent of all [auto] policies are carried there. State Farm's pulling out indicates that even with
those rates they can't make a business case for providing insurance in that state. Of course, State Farm is not
alone. Other insurance companies are making changes in where and how they do business, too."
What is causing such a profound change in the industry?
"Auto insurance is a very cyclical business," Brown says. "Simply put, insurers make their money by investing the premium dollars between the time when consumers pay the premiums and before those dollars are paid out to the consumers making claims."
According to Brown, good investment returns create greater incentive for insurance companies to draw in greater numbers of dollars. And that, of course, leads insurers to lower their premiums to attract more consumers and to gain market share. "As a result, many insurers don't break even with what they charge and what they pay out," Brown says. "Rather, they make up the difference on their return on investments. When investment returns soften, that puts the insurer in the position to raise premiums or shed higher-risk consumers or a combination of the two."
Because of ongoing changes in the investment market, insurance tends to be cyclical—premiums will go up and then go down. "Up until the last year or so, investment returns were quite good, which held down costs of insurance premiums," Brown says. "But as a result of the recent market downturn, insurance rates are expected to rise in the coming year."
In addition to a positive return on investments, what other industry factors help keep insurance rates low?
"There are several important factors that play a role in dictating insurance rates," Brown says. "Aggressive enforcement of drunk driving statutes, safer vehicle equipment, better design of roadways—these have tended to ease claiming rates." Brown is quick to point out that even though accident rates have been going down, claiming rates have risen in recent years. "Consumers are more likely to file bodily injury claims, which are much more expensive than property damage claims. When you have the changes in claiming behavior and the recent poor investment returns you're going to see a significant amount of pressure to raise consumer premium dollars. With more than 100 million vehicles in the United States, you are talking enormous numbers of premium payers and an enormous number of claims."
What role do medical costs play in the auto insurance industry?
"Higher medical costs are a major concern for insurers," says Brian Sullivan, founder of Risk Information Inc. in Dana Point, Calif., and editor of Auto Insurance Report, a weekly newsletter covering issues facing the auto insurance industry. The cost of treating people injured in car accidents is on the rise, as is the number of personal injury cases being filed. Because higher medical, repair, and liability costs affect the cost of insuring all drivers, even those with relatively good records can expect to see a modest increase in the cost of insuring their vehicles in the year ahead.
How does a person find the best deal for auto insurance?
The enormous price differences and lack of consistency illustrate the most important point about searching for affordable auto insurance: You have to shop around. "Every insurer has its own formula for setting premiums—a complex combination of such things as your age, sex, driving record, where you live, and the kind of car you drive," Brown says. "The odds are you will discover substantial differences if you take the time to get premium quotations from a number of different companies."
Survey results illustrate that insurance companies often charge greatly different premiums for the same coverage. Many state insurance offices distribute auto insurance pricing guides and the Insurance News Network includes results at its
Web site.
You can use such a guide to help identify your state's most cost-effective insurers.
Brown also advises consumers to keep in mind that price isn't everything. "You get what you pay for," Brown says. "You shouldn't buy insurance simply because it is the lowest price. You also need to make sure that this insurer is going to be there and deal with you fairly in the future. If you are willing to be persistent and take a little time, you can realize some fairly substantial savings."
Besides price, what are some key factors consumers should consider when purchasing auto insurance?
You want to determine the following:
Is it easy to collect on claims?
Does your agent provide good service?
Are you required to use an inconvenient body shop?
Ask other policyholders about their experiences, and find out if your state's insurance department keeps a complaint file on the particular insurance providers you are evaluating.
What types of discounts are available to auto insurance policyholders?
"When it comes to shaving today's sky-high premiums, you need to cash in on every possible discount," Sullivan
says. "As you shop, don't be shy about asking for breaks—you may not always be told about the discounts
you're eligible for."
For example, many insurers cut liability, medical, and collision premiums if you're accident-free, meaning
you've had your policy with the same company and haven't been involved in an accident that was your fault for at
least ten years. You'll usually get a smaller discount after three accident-free years. "Of course, discounts vary
by state and by provider so you'll want to evaluate the discount package program on a number of different
insurance companies," Brown says. Such things as air bags, antilock brakes, and antitheft devices also can
result in significant discounts in your policy.
Is the auto insurance industry heavily regulated by the states?
Insurance is one of the most heavily regulated industries in the economy. Although regulation has existed for many years, considerable confusion exists about the purposes of regulation and its potential for solving problems in insurance markets. "The level of auto insurance regulation depends on which state you live in," Sullivan says. There are various requirements in different states that insurance companies have to meet.
"Some proponents of regulation prefer the industry be nationally regulated and others prefer it to be state
regulated." Historically the regulatory basis has largely been at the state level but, as Sullivan explains, state
regulation can make matters complicated for a large national insurance carrier doing business in all 50 states.
"For them, its obviously more costly to comply with 50 different sets of regulations than if it was just one
national governing body overseeing the insurance industry," Sullivan says.
Are there any good advocacy groups for consumers to turn to if they have a concern regarding their auto insurance?
"Many state insurance commissioners
are good advocates for the consumer," Brown says. Also, the
Consumer Federation of America
frequently rates insurers and recommends a select group of insurance companies both in terms of price and in the types of services offered.
How has the Internet affected the auto insurance industry?
"The auto insurance business has yet to fully embrace the Web: Just a select few of all policies are sold online," Sullivan says. And you still need to complete any purchase offline by signing a contract and returning it to the insurer.
Still, there's nothing like the Web for comparison shopping. Some Web sites allow you to print out insurance cards for immediate coverage before the contract is actually signed. You can get quotes instantly, and many independent agency sites also will provide quotes for several agencies at once.
If there was one piece of advice you could give consumers regarding auto insurance, what would it be?
"You need to be persistent and be your own advocate," Brown says. "There are a lot of companies out there who are trying to get business. You can save some pretty significant dollars by calling a number of different sources. And don't be afraid to ask for help or advice from your insurer. That's what they are there for."
| Auto insurance expenditures increase |
According to the Insurance Information Institute in New York and the U.S. Bureau of Labor Statistics, the key factors driving the increase in auto insurance expenditures include:
Accelerating medical inflation
Rapidly increasing jury awards in vehicular liability cases
Illinois court decision forcing insurers to suspend use of generic parts
Higher costs for motor vehicle bodywork
Rising average price for new vehicles
Trend toward purchase of larger, more expensive vehicles such as SUVs
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| Purchasing auto insurance |
Below are some questions consumers should ask before purchasing auto insurance:
Does your automobile insurer replace your vehicle with a brand new car and not take a deduction for depreciation?
Does your automobile insurer replace items like tires, batteries, and steering and electrical wiring components, without taking a deduction for depreciation, when your older vehicle is involved in a partial-loss accident?
If you rent a car and have an accident with it, will your auto insurance pay for the expenses to the rental agency for the daily loss of their rental income because the car was out of service? Does it pay for the towing, storage, and administrative costs the rental company may incur?
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August 13, 2001
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