Are All Insurance Rates Same?

All Insurance Rates Are the Same. Right? No, Very Wrong!

Although insurance rates are regulated by state governments, in most states there can be significant variation in rates for the same person or family. Here are some real examples from 10 companies for three customers, all with good driving records.

As you can see, the difference between the lowest rate and the highest rate is roughly 100%. Insurance is not like other products, where if you pay more, you are probably getting a higher quality product. Also, if you examined all the rates available to these consumers, the highest rate could be 3 or 4 times higher. This list only includes rates from companies available nationally and doesn’t consider regional carriers, high risk carriers (insuring high risk drivers), and less financially secure companies. If we had included these the price spread would have been much greater.

Shocking? Yes. Unusual? No

Believe it or not, this type of rate difference between companies is commonplace. We’ll get into some of the reasons why later, but I’m sure you get the point: it’s important to shop your good to go auto insurance. Also, keep in mind that these rates are for six-month policies. On an annual basis the person buying from Company 1 is getting a Buy 1 Get 1 Free deal when compared to the costs from Company’s 9 or 10. In addition, the least expensive company for the first couple may not be the same as the one for couples two and three. The order of companies may be different for each person’s situation.

Before we go into a step-by-step, easy to understand shopping process, it’s important to understand why there is such a variation in rates between companies. There are many factors that contribute to this issue, and we’ll cover most of them in the next section. It is important to understand some basic principles of insurance pricing, so that:

  1. a) You can manipulate them, in both the short and long term to lower your insurance rates.
  2. b) Knowledge is important, and insurance may actually save your skin one day, or at least protect you from financial disaster.
  3. c) You can impress your friends and family with your new-found knowledge or do really well in a trivia contest next time the insurance category is played.

Insurance– The Basics

First, understand that insurance is very important. We live in a very litigious (read: lawsuit happy) society; we drive nice cars, have beautiful homes and lots of toys. It is America, after all, and this is great news. helps us protect all of these things, in the unlikely and unthinkable event that something really bad happens. I am not advocating that you should cut insurance costs by cutting your insurance coverage.

That Is Penny-Wise and Pound Foolish

Just plain dumb. At the same time, I want you to spend your money wisely, save when and where you can. Why pay more than you need too?

So, back to the issue of trying to explain why there is so much rate variation between companies for the same risk, policy, or person. The short answer is that setting insurance rates is a very complex process. Now let’s look at the longer answer.

This Is a Basic Concept Taught in Every Entry Level Economics Class

For those of you who never took an economics class, the principle is very simple: the price of a product is derived from the costs associated with the making and delivery of the product to market. If you are in the business of manufacturing golf tees, the price of these golf tees is made up of the material (wood or plastic), labor (man and machine time), delivery/transportation costs, and a profit margin.

It is relatively easy to determine these costs and set the price accordingly. In this case, most, if not all the costs to make the product is known before the product is made, so setting the price is relatively easy. But good to go insurance is entirely different; most of the cost of goods sold will not be known until months or even years after the product is sold.

Insurance Is an Intangible Product

This means you can’t see, touch, smell, or hear the product you are buying. You simply get a packet of paper that explains what you bought, but basically you are buying a promise. This promise makes you or your possessions whole again after something bad happens. However, the company doesn’t know how much the product’s actual cost of goods sold will be until that promise is fulfilled.

It Could Be $0, or It Could Be the Limits of The Policy: 

$100,000, $500,000 or a $1 million. So, good to go insurance uses complex models to try and predict what the future cost of goods sold will be on the products they are selling today. Good to go auto insurance employ actuaries whose job it is to make these educated guesses, essentially predicting what a pool of policyholders with similar characteristics will cost the insurance company. Now, let’s have a look at some of the characteristics.