1. When I say this is a good policy, I mean it s good for me.
When shopping for a car insurance policy, it s helpful to know who is looking out for your bottom line. Independent agents and brokers often receive not only a sales commission, but also a supplemental commission, known as contingent commission, awarding them for selling a specific insurer s policy.
According to a 2005 Consumer Federation of America study, the most recent, insurers specializing in the personal lines sales of both home and auto insurance had relatively high contingent commissions averaging over 1% of premium. It found that 14 out of the top 20 auto and home insurers used contingent commissions. These commissions come in two categories: one is for signing customers with a particular carrier and thereby placing more business with that insurer, and profitability-based contingent commissions, for getting clients with a low loss ratio, which means individuals premiums are greater than their claims.
These incentives may lead some agents or brokers to recommend unnecessary or unhelpful coverage to consumers. Scott Simmonds, a Saco, Maine-based insurance consultant, who doesn t sell insurance, says that most insurers offer these commissions, so it s unlikely that the commission will have an impact on your agent's recommendation. To protect yourself, ask about commissions and have prospective agents explain their recommendations.
2. Don t expect price declines anytime soon.
It s highly unlikely that auto-insurance policyholders will see a premium decrease in the near term. We have observed steady and moderate single-digit automobile rate increases since mid-2008, and we believe this is likely to continue as insurers attempt to protect profit margins and get ahead of looming inflationary costs, says Neil Stein, a credit analyst at Standard & Poor s, in a January 2010 report. (S&P s Insurance Ratings provide corporate not consumer credit ratings.) In comparison with other types of insurance in this sector, insurers are typically able to implement price increases more quickly because of the short-tail nature of a policy We do not expect this sector to experience price declines.
While rate increases vary based on several factors, the cost of automobile insurance increased about 2.5% nationally in 2008, after falling in 2005, 2006 and 2007, according to federal government and state regulator statistics cited by the Insurance Information Institute.
In part, the rate increases follow premium growth declines since 2003, which the S&P report attributes to price competition among insurers and consumers purchasing less coverage because of tight budgets. But Doug Heller, executive director of Consumer Watchdog, a nonprofit consumer advocacy group, believes that another factor is at play. He points to hikes on auto and homeowner s premiums from 2000 to 2003, which were precipitated by investment losses by the major insurance carriers. He says this could be happening again in the wake of the subprime crisis and other troubling economic news. The rest of America has to tighten their belts when investment opportunities weaken, but insurers just tie the noose around policyholders necks to keep their income high, Heller says.
3. Spotty credit? That ll cost you.
Consumers who have blemished credit histories could end up paying more for their car insurance even if they re existing policyholders who ve always been on time with their payments but end up falling into a rough financial patch.
Most insurers have for many years used credit information, along with other factors, to determine risk and the premium paid. It s estimated that at least 90% of insurers use credit history in their underwriting, according to the Insurance Information Institute. Although consumer advocates argue that it unfairly penalizes the poor, it can also bite the middle class, says Birny Birnbaum, executive director at the Center for Economic Justice. According to a study co-authored by Elizabeth Warren (currently the chair of the Congressional Oversight Panel investigating the financial regulatory ststem), 62% of all bankruptcies in 2007 were caused by medical costs even though the majority of those people had health insurance. The problem is further exaggerated by the recent financial market meltdown and recession, which have hammered credit scores of middle-class consumers, says Birnbaum.
Since many insurers do factor in credit history, consumers should get their credit report from each of the three bureaus TransUnion, Experian, and Equifax and check them for errors before shopping for insurance.
4. How do we set premiums? That s for us to know and you to find out.
Many factors impact premium disparities, and one of them is a policyholder s state. According to a 2007 report from the National Association of Insurance Commissioners, national average year-long annual premiums and expenditures cost $911.84 in 2007 ranging from a low of $620 in Iowa to a high of $1,288 in the District of Columbia.
What s really muddied the waters are the formulas used to set premiums for individuals. In general, most insurers sort customers into pricing tiers (which often range from two to four) based on where they live, their age and their driving record. But more variables have been added to the mix, including credit history, homeownership and limits on past policies. And since each insurer interprets these variables differently, it s even tougher for consumers to get a handle on the system.
5. Your repaired car might look and run like new, but it s worth a lot less.
As many policyholders know, when the other party s insurer is paying for repairs after an accident, you have the right to opt for original manufacturer parts instead of generic aftermarket ones. But even with the best parts and service in the world, a fully repaired vehicle will often be worth less as a used car or trade-in than an identical car without the accident history, says J.D. Howard, executive director of iCan, the Insurance Consumer Advocate Network. What many people don t realize is that you re often entitled to collect that difference, known as diminished value.
But what if your insurer is paying the repair bill? You may be out of luck. While policyholders in Kansas and Georgia can collect diminished-value losses from their own carriers, in most states it s less clear-cut. In 2005, Illinois s supreme court ruled that policyholders there had no right to collect diminished value from their own carrier. Since then, this first party diminished value litigation has taken place in more states, including Arizona, Florida and Texas. Also, if the damage is due to negligence of an at-fault party who doesn t have insurance or has insufficient coverage, diminished value would be covered if your policy includes uninsured motorist property damage, says Howard.
Luckily, it s not a total loss. Even if you can t collect diminished value outright, you can possibly write it off on your tax return, he says. (Consult your tax adviser.) That s why it could be a good idea to hire a post-repair inspector: to ensure that the work was done properly and to assess diminished value.
6. Totaled your car? It ll be hard to collect its full value . . .
Policyholders may be surprised that insurance companies often don t get their valuations from a standard source like Edmunds.com.
When a car is totaled, insurance companies often get their valuations from claims-servicing companies one of the biggest is CCC Information Services which consult proprietary databases to assess valuation. CCC canvasses dealerships in 250 local markets to build a database of comps that s updated daily, and we talk to dealers to find out what they re willing to sell the car for, says Mary Jo Prigge, president of service operations. Edmunds, on the other hand, uses transaction data, which is often higher and some consider this a better way to get more value from a totaled vehicle.
If your car is totaled, you don t need to accept your insurer s first offer. Go to Edmunds.com or AutoTrader.com to find better comps, and call the sellers listed on the insurer s report to verify their price.
7. . . . and we re more likely to declare your car totaled.
Given the haircut you re likely to take when replacing your totaled car, many policyholders would prefer to have repairs covered in all but the most severe accidents. But that s becoming increasingly difficult. According to the trade magazine Collision Repair Industry Insight, the percentage of damaged cars declared a total loss by insurers jumped to between 20% and 22% in 2009, up from 16% in 2003 and 7% in 1995. And as mass-market cars get more high tech, that number continues to increase since the growing number of electronic components and passive restraints, such as airbags, can make for difficult and expensive repairs.
What constitutes totaled ? An insurer s rule of thumb is to deem a car totaled when repairs would exceed 70% of the vehicle s value, says Howard a threshold that could be easily surpassed with a cracked fender and a few deployed airbags. And if your car s frame is damaged, it can remain a safety hazard even when repaired. If the damage is limited to a few minor, albeit expensive, components, the policyholder can challenge the settlement amount under the terms of the appraisal cost clause, he says, but the authority to consider a vehicle reparable or [a] total loss lies with the insurer.
8. Your mechanic may work for us.
The auto insurance industry has long relied on direct-repair programs with insurers maintaining lists of recommended repair facilities. Some insurers have taken the relationship a step further. For example, Allstate s Good Hands Repair Network includes repair facilities throughout the country that have agreed to provide repairs to Allstate Insurance customers and claimants, says a spokesperson.
Whether it s a network of preferred providers or outright ownership, such coziness between insurers and body shops makes consumer advocates nervous. It lets the insurers take too much control over the repair process, says Howard. And when you have pressure to keep costs low, he adds, you may start to see shortcuts in repairs. Allstate says that its program allows it to provide recommendations to customers and claimants after an accident and helps speed up the claims process by giving the customer a one-stop shop for estimates and repairs that Allstate guarantees.
More often than not, you have a choice whether or not to use the insurer-recommended shop. With Allstate, customers have the choice. So should you? It s convenient, and in some cases policyholders who take their cars there can get their deductible reduced or waived.
9. Brand loyalty might not mean much . . .
Some insurance companies offer discounts to long-term customers, but beyond that it s becoming increasingly difficult to pinpoint the benefit of sticking to one insurance company.
As more insurers adopt elaborately-tiered pricing strategies, rates may differ dramatically from company to company. As your circumstances change, it may not pay to stay. Individuals who are looking for the lowest price on a policy typically benefit by comparison-shopping, says Simmonds. He recommends that customers let their insurer know that they re starting to shop around and that they inform the insurers they call for quotes as well. Start by getting online quotes from Geico and Progressive Direct, which sell their policies via company employees. Also, ask an independent agent for quotes, as well as from companies like Allstate and State Farm, which use independent contractors.
Before making a switch, consider that another benefit of staying put is the relationship that you may have developed with an agent. That s where the loyalty pays off, says Simmonds. If you work over a long period of time with an insurance agent, [he or she] should and most of the time does value you as a client and has a vested interest to take care of [you].
10. . . . but be careful switching carriers it could cost you.
Many consumers think that when they switch carriers, dropping the old insurer is as simple as stopping payment, says Simmonds. Not so. If you don t pay a bill for the next term, chances are your carrier won t simply cancel the policy it may also report your nonpayment to the credit bureaus. (Most insurers are required to give you a certain number of days notice before cancellation.) Also, your new carrier will see a cancellation in your history, which could mean you ll pay higher rates or be declined.
To avoid the issue, get the proper documentation. Make sure the timing is right that the ending date of your old policy coincides with the start date of your new one.