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.
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