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KileAnderson
USA
875 Posts |
 Posted - 03/03/2003 : 22:03:15
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Today I got the bill for the insurance on my new truck. It was 40% higher than I was paying on my previous truck even though I paid less for the new one than I did for the old one. I figured it was time to bite the bullet and raise the deductibles.
I called the agent and she told me that if I added another policy I may be able to save some money on the multi-line discount. So I asked for a quote on renters insurance. She said, sorry, Big Red, isn't writing renters or homeowners policies right now and probably won't for the rest of the year.
OK, how about an inland marine policy, (sound effect from game show when you get wrong answer) Big Red can't write you an IM policy unless you already have a homeowners or renters or business policy. So, I then ask the obvious question, "What the hell are you trying to sell me if you can't sell me anything?"
"Well, how's your life insurance." Let me see, I'm 31, unmarried, no kids. What do I need life insurance for?
She then tells me that even though It may seem like I don't need it, it may be cheaper to have life and auto than just auto alone. She runs the numbers and low and behold the bill for the life policy and the auto policy together is $20 a month cheaper than the quote for auto alone. (it's still $20 more than it was for just my old truck though) I scratch my head for a minute and do the mental gymnastics and say, OK, I'll be down there to sign up. So an hour later, after sucking on a lollipup made of cardboard and signing lots of papers I'm now worth more dead than alive.
When I got home I sat here thinking and I came across a few questions that I cannot find the answers to.
1. In a market where stocks are down and interest rates are down, reserves are low, why would a major insurance company turn down premium dollars? I realize that living in southern Louisiana that we are prone to a hurricane every now and then, but that's pretty much it. We may get one every 5 years or so, but pretty much all of the buildings that I grew up seeing everyday are still here. It seems to me that SF would want to boost the premium base just to keep the cash flow positive. I mean, they are already heavily exposed with the policies they have already written and from what I've learned about the risk pooling, the more hands you have contributing to the pool the better. So why aren't they willing to write me a $50,000 renters policy? I've never been ripped off, I live in a gated community on the third floor, I've never filed a property claim in my life. I'm the perfect risk. I realize the moratorium is not a personal thing, but it seems they would just tighten up the requirements and write some good business and turn down the bad stuff.
2.How on earth is it cheaper to purchase Auto comp, coll, and liab. and a $50k term life policy than it is to purchase just the auto policy. I realize that at my age and lifestyle I'm not much of a risk for dropping dead, but the risk still exists. They won't write me a renters policy even if I'm willing to pay more but they will essentially give me a term life policy for free and a discount on the auto policy to boot. How does that make sense?
3. This may be answering the above question but is it possible that this is a marketing tool and if so is it ethical or even legal. Follow me. Guy goes out and purchases a new truck. Big Red figures guy must be doing pretty good, he just bought a brand new truck, but wait, no homeowners, no life policy with us, what's the deal. Let's jack up his premium then he'll call and complain. When he does, we'll offer to sell him some more insurance for a discount. We get more premium than we were before with slightly less risk and the sucker...um...insured thinks he is getting something for nothing pretty good huh? Me, being the sucker, bit on it and they realed me in. I used to pay $100 a month for car insurance, now I'm paying $120 a month for car and term life and since they originally quoted me $140 for the auto suddenly I think I'm saving $20 but in reality they are squeezing me for an extra $20 a month than they were in January. Could the insurance industry really be this slick?
If you are here I thank you for reading this missive. Hope some of you have some thoughts on the issues. |
Edited by - KileAnderson on 03/03/2003 22:12:47 |
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Cheryl Joyce
USA
45 Posts |
Posted - 03/03/2003 : 23:54:30
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You know that insurance policy that you adjust and has an "except" when such and such occurs, or "if" conditions are???? That is the same except and if for buying the insurance as it is for settling it.
You explained a lot but there is so much going on under the sheets that you have no clue about.
Another typical example I have three driver's, three cars. I drop one car the 6 month premium INCREASES $60.00 PER POLICY PERIOD. I insure a non running vehicle - just sits in my yard all pretty like, and my premium drops $120.00 just to fall apart piece by piece and crowd the space. So guess what? It sits there, I insured it no body drives it, it doesen't run. I save money on premium.
Ok, back to your thing, your new truck has no loss history in the industry and if wrecked will be replaced with "NEW" parts. There are no aftermarket pricing for the NEW Vehicle. There really is not a stock pile of new parts for it if it were to be involved in an accident because, the parts rolling out of production are for new produced vehicles not for existing vehicle which experience damage.
The discount received is for supporting business, they give you a break because you are becoming a more dedicated customer now rather than sharing your needs with others. Life insurance at your age is a good thing, you lock in while you are in seemingly good health at an economical premium, you pay for several years and you can end up not paying anymore. You are what is call pre-planning. You are setting the stage for before you start the family and kids and deep debt, you are getting a head start, the company looks at you as a wise investor and therefore offer a discount cause you are illustrating that you are a good risk. And it really goes a little deeper than all that too but it's a share risk thing. They collect your premium for vehicle coverage you wreck the vehicle they lose in the odds game. But if you retain your life policy and you live you keep giving them money in a consistent manner they are pooling that life ins. dollars with many others just like you and they are investing that money and are making money most likely in a real estate building and now they have reduced your loss of the vehicle that you wrecked cause they are making the money you lost them in rental and real estate. It's all a circle. Yes, they are that smart. Do you know where the Banks and Government get their loans from?------------------------Legal Reserve. The Legal Reserve is the set aside portion of money that insurance companies collect to have for a rainy day. They are forced to place a percent of their collected premiums into the Reserve so that they can gaurantee to have enough money to pay their claims. Since they are forced to save percentages of every premium they have such a reserve that they loan it to the government and charge them interest and they make even more money. Again, all part of a cycle. Then the underwriting part, I've watched the companies do this for 23 years. They open up - get real lenient let every body in to get some pie - they collect their premiums because there is something to gain, --cash flow, and then when the have enough of the good, bad and ugly one, they tighten up again and start weeding the claimed ones out. They are the losers and they don't want to insure them any more and they put them out to pasture, but then what they do is create a sub-standard market that the loser can at least get insurance with but at a much higher price and they start the song and dance over again, just a new verse. It's called Mo-Money!! Heck somebody is going to get the premium it may as well be them just with a higher price.
No one ever said insurance, from any view was simple. It is all tied together. Good luck.
Cheryl |
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KileAnderson
USA
875 Posts |
Posted - 03/04/2003 : 00:18:02
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| I understand that the reason my new vehicle insurance is higher is because it's a new vehicle, but the confusing part is, when I bought my previous truck, 6 years ago, it was also new and I paid the same premium the entire 6 years. Why didn't my premium go down when the availability of parts went up over those 6 years? I truly don't understand it. |
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CCarr
Canada
1200 Posts |
Posted - 03/04/2003 : 12:00:32
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Kile, your opening post is one that is echoed by many thousands of insurance consumers daily.
Your concerns evolve around two main concepts - "tied selling" and "integrated financial services". The only true aspect of the underwriting function that comes to play in your situation, is rate structuring.
My views are quite different from Cheryl's, and I make no attempt for you to agree with the exercise you went through; only hopefully that you better understand it. Some of my views are governed by legislation in our marketplace, but likely the concept is the same in your region.
First though, it is interesting to note in a comparative sense, the experience you had; due to the insurance distribution system you chose. Through your choice of using State Farm as your insurer (and none of this is a criticism of SF), you have greatly limited your 'choice', due to the nature of the agent utilized. An Independent Agent, has contracts with a number of insurers, and it is the obligation of the Independent Agent to utilize all their insurer markets to satisfy your insurance needs. The majority of insurers depend on Independent Agents to sell their products. Conversely, the Exclusive Agent is obliged to place business with only one insurer; which is the normal State Farm distribution system.
Next, to get one unrelated area out of the way; is the unavailability in your region of renters insurance by SF. That is not particularly alarming, many insurers in many regions, at varying times in their underwriting cycles; choose to abstain from writing a certain class or develop quite a thirst to write it. Renters insurance, with any insurer, is not a favorable class; and they measure their current taste for it as it relates to a percentage of their personal property book in any given region. Renters insurance is historically a costly class of insurance for two main reasons - its loss experience and its cost of acquisition; the latter being reflected in the lower than average renewal rate by policyholders, who by their more transient statistics don't renew their RI to proportionate levels of other lines of insurance. The 'cost' of new business to insurers and agents, is much higher than renewed business.
The main element that binds tied selling to integrated financial services is, "client relationship management". The concept has been around for a long time. From the point of view of your agent, it was immediately triggered when she said, ".... if I added another policy I may be able to save ....". The thrust of this agent is twofold, first, concentrate on existing clients as a source of incremental sales and revenue; second, obtain more business from existing clients, which is essential to relationship management.
What the agent is doing with you, is no different than a carrier does with their agents; and no different than the distribution channel at your local grocery store.
The primary focus of relationship management is maintaining and retaining clients relationships. The emphasis is on establishing long term multiple purchase relationships. The goal is to have you perceive that the overall value received from the agent exceeds the associated costs; and therefore you will keep all your business there as opposed to you shopping around. From the agent's or grocer's perspective, it is much easier and cost effective to sell several products to one existing customer; than to sell a single product to multiple prospective purchasers.
In that regard, the manufacturers of products (State Farm, any insurer, any food manufacturer), will provide a range of products to their distribution channels; and provide inducements for the sellers (agents or grocers) to allow tied selling of their integrated product line.
Hopefully, the above gives you something to better understand the issues related to your Q1, and in part to your Q2.
The other piece of your Q2, is the term life policy; which is also deeply rooted in statistical analysis. In that regard, you are a 'great' example, not the best, but great. At one end of the scale, is the satisfactory answers you gave on the TL app, in addition to your age and marital status; all adding up to you being a great (as in good) risk. However, statistically, your age and marital status indicates a lower retention rate of that policy into the years where you become a less of a satisfactory life risk. Therefore, based on statistics, your TL premium money is to an extent, considered as 'gravy' by a TL insurer; at this point in the cycle of the TL policy.
Insurance is 'slick', but not to the extent of the scenario you pose with your Q3. The anomalies you perceive, that led you to consider your incorrect scenario, are found in the rating structures of insurance. Without the details and data relevant to the comparison of your premium costs of your previous vehicle to the new one; only generalities can be offered, as a view to understanding the experience you endured.
However, within those generalities, I have to conclude certain elements of the underwriting remained constant, as follows; listed drivers, years licenced of listed drivers, drivers conviction and accident history, described use of the insured vehicle, same coverages and limits on both vehicles (previous & new one). Any differences in these areas, disclosed to your agent, or noted by your agent; will offset the generalities noted.
Only you Kile, can answer some of these questions, because you and your vehicle is what defines the risk; and in turn the premium set.
I'm not a 'student' of underwriting, nor do I want to be, but the following key components are considered to determine the rate of your premium; which as you can see from your policy, the liability and physical damage portions absorb most of.
Territory is a factor, obviously accidents are more frequent in urban areas, than in rural areas. Therefore, the exposure to liability and collision losses is greater in an urban rated territory.
Class of auto and use, is where there is a wide variation in rates. The same year, make and model of a vehicle, will have widely ranging rates in the same territory - dependent on its use, for example, private pleasure vs business vs taxi cab. Also, the insured who says he drives an average of 60,000 miles a year, will pay more than one who declares 10,000 miles a year on average.
Your age affects your premium, and it should be to your benefit this time. Depending on the 'exact' math, you may have been within that 'dark hole' of drivers 25 and under, at the onset of insuring your last vehicle. Now, statistically, you are a more 'experienced and responsible' driver, and rates do / should reflect that.
The cost new and age of the vehicle and its type, as well as its susceptibility to damage; are important rating considerations for all physical damage coverages.
For physical damage coverages, obviously the premium for a Mercedes should be higher than a Hyundai. You should consider this comparatively to your old vehicle 'cost new' versus your new vehicle. In the past, this premium difference was based solely on 'new value'. However now, damageability, repairability and parts availability; statistically apply in the rate making of any given vehicle. The Highway Loss Data Institute in the US, has provided loss costs per vehicle for a number of years, taking into account those factors.
Kile, you may in the examination of some of these issues, find some differences that affected your rating structure (you & your new vehicle), from then to now.
Then, you have to factor in the 'apples for apples' normal rate increases (if any) over the last 6 years of your scenario.
I tried to limit the 'detail' Kile, but I wanted to touch on the big picture enough, that you may have a better understanding; than what you illustrated in your Q3.
However, your latest post, is interesting. I'll assume you maintained the exact same underwriting 'profile' (other than your increasing age), and coverages throughout those 6 years. The only math explanation I can offer, is that whenever a 'regular' rate increase was applied, the rate group for the declining age and value of your vehicle, plus your increasing age; offset that rate increase. Anything else, you then become one of the thousands of people who annually do not get an adjustment of the noted rate groups, to reflect the current exposure of value. The availability of parts plays a very small role in that statistical anomaly.
There is one area of Cheryl's comments, that I should take exception to. If her reference to "Legal Reserve" is actually 'claims reserves', then it should be noted that insurers do not "loan" the government or banks their claims reserve dollars. There is pretty precise legislation with every DOI concerning what an insurer can and can not do with claims reserve dollars; and part of that is the investment limitations and conditions.
Kile, I hope I've commented enough, but not too much, to try and give you an understanding of your recent experience. |
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KileAnderson
USA
875 Posts |
Posted - 03/04/2003 : 12:42:46
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Thanks, Clayton. I majored in accounting and was able to master abstract concepts such as accounting for good will, accelerated depreciation, the convoluted US tax code, depreciation of mineral assets still in the ground and other such minutia of the bean counting arts.
Insurance accounting was either not offered or I missed it when choosing my electives, not knowing that I would eschew the title and confines of CPA for the uncertainty and freedom of IA.
I am familiar with the frustration and confusion many insureds feel on the back side of an insurance policy (claims). My only experience with the front end has been in purchasing auto insurance and serviceman's life policies in the Army. The alchemy of determining risk and insurance rates is an application of my least favorite department at the LSU business school. When I was metriculating there it was known as QBA (quantitative business analysis) now it is known as ISDS (information systems and decision sciences). It was the classes overseen and taught by this department that I most dreaded. Math and using computer software to analyze data have always been interesting to me. It was the BS(and I don't mean bachelor of science) that was pulled out of this analysis that I always had a hard time wrapping my mind around. Once they started throwing around terms such as "standard deviation" and "outliers" and other such things my very concrete brain began to falter. I prefer photographs to Picaso, prose to poetry, if that makes it a little more clear.
For some reason this entire experience just had me very interested in the art of underwriting and also wondering if something far more sinister was afoot. Thanks again for the input. I hope more readers have some views on the subject or maybe similar stories. |
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Someone please explain underwriting to me.
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