Why are some car insurance companies cheaper than others?

With the constant barrage of insurance advertising centered on how much lower everyone else’s rates are compared to the next company, you might be wondering how one particular company can offer lower insurance premiums than everyone else.

It’s a valid question, and the explanation is simple. Each insurance company has a different underwriting process. They look at the same factors differently when generating insurance quotes. Size and other factors determine how conservative and insurer has to be, and some specialize in certain kind of customers.

How important is timing in getting an insurance quote?

The reality is that no car insurance company will be the cheapest for everyone all of the time…it’s just not possible. Rates can change daily depending on factors that vary between insurance companies. Things like how many claims are filed in a month can vary widely affecting collision coverages and comprehensive coverage rates.

Each company decides exactly what type of driver they want to attract to purchase their product. If you happen to find the company that’s “looking for you,” you’ll get the cheapest rate available.

Make no mistake though. Just because you aren’t the insurer’s ideal driver doesn’t mean many companies won’t try to sell you a policy. They’ll just sell you a much more expensive policy. Keep in mind, there are some companies that will drop you after you file your first claim or refuse to take you if you have too many marks on your record.

So if you don’t shop enough, or simply believe a television commercial spokesperson wouldn’t steer you wrong to earn his three-million-dollar endorsement check, you might be paying too much.

If you’re not matched up with the right company, you’re not getting the best deal. This is why you should work with an independent insurance agent who will shop your rate with multiple companies and find the right match.

Can you find a killer deal with new insurers?

Every once in a while, a company will come along and decide to sell a ton of cheap car insurance to just about anyone. Perhaps the company is new to a particular state and wants to make a splash by attracting customers with low rates. Of course, these are generally promotional rates, and they’re only temporary. After the initial promotional period, average rates may go up even for those who jump on early and keep a clean driving record. (For more information, read our “Is insurance cheaper if you own the car?“)

But sometimes this is done by accident. Insurance companies won’t know how much money they made in a prior year for quite some time. So they may also “release” a product before realizing it was too cheap.

Just think, every lawsuit from insurance policies sold in 2011 must be settled in court and all insurance claims paid – perhaps in 2013, before the insurer finds out they weren’t charging enough money. Generally, small companies act more conservatively, though.

After a long enough time of selling insurance too cheap, the insurer will finally notice they’re losing money by paying out more in claims than they’re bringing in. This is when you will see your previously cheap insurance policy take a huge jump at renewal time… assuming you’re paying attention.

[How are car insurance rates determined?]

Are insurance companies all about profits?

Auto insurance companies are no different than any other type of company…except you legally have to purchase their product. They have to consider the risk they’re taking on, the value of their product, and price their products accordingly. Either way, every type of business is subject to basic principles that guide how much money they can make and what they can charge for their product.

Basically, how many customers they have, how much it costs to generate the “product,” how much it costs to attract customers, and how much they can charge before their customers think they’re being ripped off and purchase from the next guy.

All said, a company that operates efficiently on each front will be able to offer a less expensive final product, in our case a car insurance policy.

How are insurance companies different than other businesses?

Insurance can be significantly more complicated because insurers don’t just sell you a vacuum and never speak to you again. They sell you a promise to keep you from being bankrupt in the event you hurt a person or damage their property, by paying the costs to “fix” everything if anything goes wrong.

An insurer can make a ton of money off of a person if they pay premiums and don’t have accidents, but lose their shirt on a person who gets into accidents and files claims for tens-of-thousands of dollars. The smaller the company, the bigger the impact of even a single claim.

Additionally, insurers can experience “bad luck” that costs them hundreds of millions to billions of dollars. When Hurricane Katrina struck the Gulf Coast, thousands of cars were totaled and insurers had to cough up a ton of money to policyholders. (For more information, read our “Why do insurance companies total cars?“).

In the end, no matter how well you execute a business plan, an unexpected billion-dollar loss makes things difficult. This explains why insurers must set aside cash or easily convertible equities.

Are big or small insurance companies more expensive?

The Allstates and State Farms of the world spend millions on celebrity spokespeople to “sell” their insurance product to you, and thus must charge a premium for the car insurance they offer.

Ultimately, they can try to charge as much as they want, but it’s up to the state department of insurance to determine what they will allow.

Some car insurance companies make every effort to charge the maximum amount possible.  These companies are typically the ones that advertise the most, because they’ve “sold” you on their product, and can validate charging more.

Smaller companies may also charge more because they have to balance out costs with fewer customers. Unfortunately, while their rates can be extremely competitive for low-risk drivers, they are not nearly as competitive for everybody else.

If you’re looking for affordable rates, the average consumer will find the largest insurance companies can provide better options for your auto insurance policy with greater financial stability. The only question is will they?

Read more:

• 10 ways to lower your car insurance costs.
• Is insurance cheaper for cars or trucks?