Some consumers view insurance as a commodity. This leads them to shop for simply the best rate. It has become more common for consumers to take to the internet in search of the cheapest rates available. The Insurance marketplace has been transformed by the likes of Progressive, Geico, Esurance, Lemonade and others.  All alluring with ads promising savings over the competition.

To understand why insurance is not a commodity, you first you must better understand how insurance actually works. Insurance is the pooling of risk among a group with similar risk characteristics. The more perceived risk, the more the insurer must charge in the form of premium. This is determined by actuaries using a multitude of factors. The amount an insurer pays out in claims has a direct effect on how much it must charge to remain solvent, along with administrative costs. Rates are reviewed and approved by each state’s regulatory departments to ensure they are based on actual claims experience. If an insurer tries to lower rate too much or raise them unfairly, the state insurance department will not approve it. So as you can see, in order to have better rates an insurance carrier must pay out the least, or spend less on administrative costs to have the lowest rate.

Based on the way rates are developed, you can come to a couple conclusions, that the companies that spend less on advertising and other administrative costs, would have lower rates unless they payout more in claims. Or if a company is spending more on advertising and other administrative costs, they would need to pay out less in claims to have a lower rate. So to truly have the lowest rate, the company would need to keep both costs and claims at a minimum. The problem is that if the company does not spend a reasonable amount in advertising, they are deemed by consumers as a less reputable carrier, when in all reality it may just reflect them trying to compete in the marketplace while creating a solid reputation for paying claims.

Another large cost for Insurance companies is software. To offer instantaneous pricing online to consumers, an insurance companies must spend a large amount in software infrastructure. If we have an insurer that is spending more in software, advertising, and administrative costs, you could see that they would need to keep their claims down in order to offer a competitive rate. There are a couple different ways a carrier accomplishes this. First, they do their best to ensure they only insure low risk individuals or businesses, through strong underwriting principles. Second, they develop strong language in their policies that allow them to limit the amount of claims that they would reasonably pay out.

What most consumers do not understand is that the policy language developed by the insurers can vary greatly from one company to another. This is the insurers greatest weapon in not paying certain claims. Thankfully for consumers, the language used is also reviewed and approved by each state’s insurance department. This safeguards the consumers to an extent, but there are ways to be reasonable and not pay all claims. So be aware of your policy exclusions and endorsements, it just might save you hundreds, if not thousands at the time of a claim. Also be aware of what differences might exist between one Insurer and another.

Michael Vereecke, CLCS
Michael Vereecke, CLCS

President of Customer First Insurance Group,
Commercial Lines Coverage Specialist (CLCS) Designated, and Property and Casualty Licensed since 2009