Your Loyalty to Your Insurance Company could be Costing You Over $500 on Average

Do you deem yourself to be among your auto insurer’s high-value, loyal customers? Then you would think that you deserve to pay less for insurance. The truth is, you may be surprised to learn that you actually are not.

Truthfully, most organizations honor their most loyal customers with freebies, discounts, and incentives. However, the exact opposite happens in the car insurance industry. You can be slapped with higher yearly premiums just for being loyal to your auto insurer.

This act of burdening loyal customers with high premiums is referred to as price optimization. Since price optimization occurs all the time, it affects a large number of auto insurance buyers. This explains why an insured motorist could have no accident history but witness a sudden surge in their subsequent premiums.

Since auto insurance carriers do not often reward customer loyalty, we suggests that motorists should shop around in search of the best price instead of sticking with the same carrier. And this will save them a lot of money.

Evidence suggests that only a small percentage of new customers shop for new insurance policies. For this reason, insurance carriers raise rates on their loyal customers to make up for losses. 

According to a JD Power Insurance Shopping Study, new customers account for 2% of the personal lines auto insurance market and the percentage of customers who stay with their current insurance company hovers around 88%.

With that small movement in new accounts, insurance companies are compelled to adjust rates on their loyal customers. This action causes unintended consequences to their most valuable customers. But the carriers don’t suffer any business loss as these folks do not usually shop around. According to the same JD Power Insurance Shopping Study, High-Value Customers represent 21 percent of all insurance shoppers, while high-risk policy seekers comprised nearly 57 percent of all shopping activity.

Why Do Auto Insurance Companies Increase Rates?

Insurance companies raise rates to stay profitable. Unlike companies that offer consumer goods or services, insurance carriers do not make a profit immediately after a sale. Most of their operations and profit rely on how well they understand their customer’s behavior and price their products accordingly. For instance, if they write an auto policy for an individual, and the next day he totals his vehicle with a resulting claim of thousands of dollars, the carrier may never recoup that money, no matter how many years that customer remains with them.

It is a numbers game

Accident-free drivers carry the burden for those who are high-risk. Most companies have mastered the technique of spreading risks between bad and good drivers. The one scenario insurance companies try to avoid is overcharging high-risk drivers. If they overcharge the high-risk drivers, that segment of the population will not be able to afford insurance. In turn, this creates a wider pool of uninsured drivers, which causes the insurance company to incur losses. As such, if they significantly increase rates on the good drivers, they may alienate them. This creates a company solvency issue and a more equal distribution of costs.

What to do

Smart insurers are finding ways to significantly reward good business while encouraging high-risk drivers to adopt good driving habits. For instance, they are giving them hefty discounts for installing smart driving detection devices. The caveat is that there are only a few smart insurers who are implementing these risk-reward strategies and doing it well. You – the consumer – without having much insight into the industry, will find it difficult to track who is offering these great deals. So what can you do?

The following tips can help you find a better deal:

I. Bundle Your Insurance Policy

A bundled policy is normally the best option in terms of price – insurance carriers give special preference to clients with more than one policy, namely, a discounted rate on all bundled policy packages. In addition, some carriers only require payment of one deductible should you have a loss that involves all your insured assets.

Having all your policies in one place makes it convenient to write one check and if your carrier writes nationally, you can even insure your out of state properties and get credit for multi-policy discounts.

Most insurance brokers suggest a combined home and auto insurance policy because bundling saves customers 5% - 25% of the premium they would normally pay if they purchased independent policies. Having your policies in one place will save you from the hassle of running from one agent to another. This allows you to save time for duties that matter to you the most, while one company takes care of your insurance plan.

II. Shop Around for Better Policies

As reported by JD Power, there are a number of people who do not shop for their policies. As a result, when carriers adjust their rate, these people tend to carry the burden of the resultant premium increase. While for you it is time-consuming to shop for policies, your agent is equipped to look out for you and find the best possible deals at policy renewal.

In addition, insurance rates vary from carrier to carrier, and knowing the carrier’s appetite for your risk is crucial in finding the best rate. Again, your agent should know each company’s risk appetite and shop for your policy accordingly.

The following are some of the factors carriers look for when determining your auto insurance rate:

  • The type of coverage you already have
  • The vehicle you own
  • Your place of garaging
  • Your driving experience
  • Your driving history
  • Past claims
  • Past cancellations

If you fall high on any of these risks, your rate will be significantly higher than average. By policy shopping, your insurance agent can help you find competitive rates and suitable coverage for your risk.

iii. Ask for Higher Deductible Limits

The insurance deductible is the portion of a loss for which you are responsible to pay. The idea of you having to pay a deductible emanated from the concept of eliminating small claims. For example, if you have $500 deductible, any damages your vehicle suffers that falls under $500 is your responsibility and you do not, therefore, need to call in a claim; this saves the insurance company’s expenses on adjusting small claims.

The standard deductible amount is $500; however, most companies also offer deductible amounts below or above $500. Naturally, it will cost you more to lower your deductible, however, when you raise your deductible to $1000 or more you save a substantial amount of money on your insurance.

Depending on your risk appetite and the type of driver that you are, a higher deductible might be the best choice for you. Additionally, if you are a homeowner, you should have a deductible of no less than $1000. You may even consider a percentage deductible on your homeowners insurance if you can afford it. The savings on that are tremendous. Counseling from your independent insurance agent on what kind of deductible is right for you can save you hundreds of dollars.

IV. Request for a Higher coverage Limit

Here is a little secret… the higher the limits you carry on your auto insurance, the more attractive you are to an insurance company. While bodily injury limits may be higher than the compulsory levels, you will find more attractive rates when you have and maintain higher limits.

An increased coverage limit is the maximum amount an insurance company will pay to cover a loss. One of the most important benefits of high coverage limits is that you are offered more protection than you would get with a lower limit. For this reason, obtaining a high coverage limit is more convenient than obtaining a lower limit.

v. Lower Coverage on Older Vehicles

It is advisable to reduce your older vehicles’ comprehensive and/or collision coverages. Actually, you might be losing money for buying coverage for a car whose value is less than 10 times the insurance premium. Since banks and auto dealers can tell your car’s worth, consider reviewing your coverage when renewing your policy and ensure that you maintain your insurance needs.

Where it all makes sense

These seven actions will certainly prompt your insurance agent to find you the most sensible policy. While loyalty to your agent and insurance carrier is great, you should ask yourself whether it is worth costing you over $500 on average? Loyalty has a price and it’s up to you to decide who should bear that cost.

At the very least, you should know your options and what’s available to you.

Good luck!


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