How Insurance Works and Why You Don’t Matter!

How do you like my Clickbait title? LOL!

So I think the most common thing I field as an agent is frustration from clients. Partially because of just common misconceptions, traditional view points that no longer apply to insurance, and sometimes just blatant ignorance about insurance in general. Anytime someone does not know about something they purchase and there are changes or fluctuations to things it inevitably will cause anger and dismay. So here is a short article on how you can stay in the know on your insurance and avoid becoming angry with your carrier, agent, or both!

How Insurance Works

So first off, most people do not understand insurance. If I had a $1 for every time I heard “I haven’t had tickets or accidents so why is my premium going up” I would no longer be in insurance and I would be on a beach with a Corona!

Insurance carriers pool like-risk together to share the total cost of insuring that pool of people. So every one of similar age bands, driving similar cars or in a similar business, in similar areas etc are pooled together and a premium is assigned to how much a carrier estimates they need to cover claims and make margin on that risk. These carriers are using high tech ways of predicting premiums and insurance companies are known as some of the largest databases in the world for data on the people they insure. So much so that State Farm can’t even contract their servers to a company like IBM because they can’t even handle all the information that State Farm by itself has on its customers. Kind of scary but its all to better predict the likelihood of losses and try to remain as competitive as possible.

The downside to this pooling of people is that sometimes others cause claims and you don’t. If the amount of claims exceeds the carrier estimate then rates are adjusted up, if they are better than predicted they are kept the same or reduced for the next term. The reality of this is that even with the increases that happen it is still much cheaper to insure with a group than to try and insure just yourself even if you don’t have tickets or accidents for 50 years!

Why it benefits you that they pool us together

If you tried to insure yourself for let’s say two $20,000 cars that’s $40,000 of potential loss in property damage plus however much liability damage you want to insure yourself for this example we will use Nevada state minimum liability and say that you will insure yourself for $25,000 per person / $50,000 per accident for bodily injury you might be liable for to someone else plus $20,000 of property damage to their car or other property you might damage. So combined between insuring $50,000 of bodily injury, $20,000 of property coverage, and $40,000 in your own vehicle value if it was totaled now we are insuring a possible loss of $110,000. Let’s say on average someone has a claim eery 10 years which we know its closer to 2 years but just to keep numbers simple and to kind of show the severity of this, even more, I am going to use 10 years. That would mean that the insurance company to break even on a loss in 10 years for $110,000 of exposure would need to charge 11,000/year which would be roughly $915/month to the insured. Suddenly your $15 increase doesn’t seem so bad huh?

Where does this money go?

Now, these premiums being collected by the insurance company are also invested which is really what hedges some of this risk and the companies are really good at doing what they do so they can predict pretty well how much exposure they will have each year BUT its not possible to predict accidents to 100% certainty since we have no idea what will happen and how severe it will be so its important to take everything with a grain of salt and understand how that works.

So back on topic here, Daniel…

Additionally, your agent doesn’t like rate increases either. Yes, they get a slight pay increase when the premiums are larger so they benefit from those increases BUT the number of calls they get complaining about insurance far outweigh what they are compensated to field them.

How your agent is compensated

Your average agent makes between 10-15% on each policy. So if you are someone who pays $3000/year for insurance your agent is likely making between $300 and $450 to service your policy ALL YEAR! Raise your hand if you want to work with a client every day for 365 days a year for $450 in return. The amount of money your agent makes per hour of service on you is likely very low. The majority of clients do not understand that which is a frustration of the agent so knowing this information can help you better understand all the work your agent does for you for a price that you do not even pay because its provided by the carrier so you get all this free service every year and then drop your agent after a $5 increase for the next cheapest carrier and drop them like they did nothing to help. Now some agents deserve that but most of us have massive service teams to make sure you are happy which is a heavy cost to doing business and when a client only sticks around for 6 months or 12 months due to small increases it makes it frustrating for both the agent, who didn’t ask for the carrier to change things, and the client who didn’t want them changed.

Why are premiums changing?

Another thing that most clients do not understand is that everything changes. It has to. The cost of milk, gas, housing, cars, you name it, it’s changed. So when increases happen in insurance sometimes its time to say goodbye to the carrier but often times its just time to say goodbye to one cup of coffee at Starbucks because you shouldn’t be putting your assets and income at risk over $5/month unless you literally are in a place where you are choosing between feeding your kids and working with your insurance carrier then I can understand kicking the carrier to the curb because family first. So many people making long term decisions based on short term information. They feel bad about the increase so they change their entire long term strategy because of short term discomfort and what that does is most the time leads to higher premiums for them over a 10 year period.

Premiums are changing because things are changing in the world in other ways too! Cars are more expensive so total loss claims are much more expensive to settle out than 10-20 years ago. Cars are being made of more expensive materials like “Military-grade aluminum” and have sensors behind every panel that helps with blind-spot detection, parking cameras, front bumper parking assist, airbag sensors, temperature sensors, windshields with rain sensors…sensors! Sensors! SENSORS!!!

So now when a claim does happen on cars its much more expensive to fix but on top of that, they are happening more often. We have more cars per household than any other time in history which means more cars on the road and more likelihood of claims. We have a distraction from our cell phones, tech gadgets in the cars, kids in the back, DVD players in cars, billboards, fancy lights and signs, all things that take our eyes off the road. We also have exhaustion. We have been trained to work longer, sleepless, and we sometimes catch ourselves in a weak moment and people fall asleep behind the wheel trying to make ends meet.

So what does this mean for you?

It means that you are exhausted, frustrated, underpaid, over worked, and now your carrier is increasing your rate, your kids are screaming, you haven’t eaten all day, your CPA just called you and said you owe back taxes and this year taxed within 30 days, you have your landlord knocking on your door asking for rent, and a million other pressures to perform every day and here is your insurance agent trying to increase that pressure on your car insurance and out of all of them he/she is the easiest one to take it out on because they are there in front of you and the most immediate cause of pressure and frustration and you hate insurance because you are forced to have it by the state to protect people you do not even know and the guy down the street doesn’t buy it and causes accidents that get paid by someone else and he gets away with doing things that he shouldn’t and its just not fair and why can’t I catch a break here this is so unfair and I just want to sleep and eat and be left alone….sound familiar?

We all feel the same way! Remember your agent is also a customer of the carrier so they deal with it too and are frustrated about the same things you are. So next time you get frustrated take a deep breath, including all the agents out there who are reading this, and remember we are all on the same team!

 

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