In most consumer activities, the customer exchanges money for a
product or quickly performed service. Auto insurance is different: The
customer pays a fee to the insurance company, and the insurance company
maybe provides a service or financial assistance at some point (although
if the service is never rendered, both the consumer and the company
would probably be pleased).
Auto insurance companies make money through a combination of managed risk
and the strategic use of money. Insurers associate together large
swaths of their policyholders into "groups" via the risk-assessment
criteria discussed earlier -- type of car, driving record, and so on.
Out of each group, it's likely that a very small percentage of these
policyholders will endure a car accident severe enough to file a claim
during the coverage period.
But say that one policyholder in the
group does get into an accident that results in a $50,000 payout by the
insurance company. Then, imagine that that policyholder has been a
client of the insurance company at that point for five years, and has
paid a monthly premium of $100. That person has then
brought in $6,000
to the insurance company. That would be a direct loss of $44,000 to the
insurance company -- except it wouldn't be. That's because managed risk
spreads the short-term financial burden out over the rest of the group,
the remaining members of which, in this scenario, haven't received any
payouts that cost the insurance company money.
Further, insurance companies are essentially financial institutions: They take in money and dole out money, just like a bank
does. (Many insurance companies are even branches of large banking
conglomerates.) Also, like a bank, they invest the money of its
customers and policyholders in interest-earning investments. While the
shared risk approach allows for large sums of cash on hand for claims
payouts, investments are a long-term financial strategy, to make sure
that the insurance company will have cash on hand for payouts years down
the line.
Finally, and most directly noticeable to the
policyholder, insurance companies' auto insurance policies limit
payouts. Limits of liability are set to match the premium rate paid. For
example, if the driver pays a $50 monthly premium, he may have a
$10,000 liability cap; if he pays $200 a month, the insurer may enable a
$50,000 liability cap. This means that the auto insurance company won't
pay for damages or medical bills beyond a specific amount that the
driver agrees upon.
Next: how to file a claim with an auto insurance company.
No comments :
Post a Comment