Car Insurance Premiums - Where Do They Go? How Insurance Companies Use Them

All states require drivers to have at least some form of minimal liability coverage, but would you want auto insurance if you didn’t have to have it? Assuming you’re sane, the answer is yes. And if you’re not, you probably shouldn’t be behind the wheel of a car to begin with.

A Popular (But Tired) Myth - Insurance Companies Are “The Bad Guys”

Auto insurance company executives are one of the few groups of people who are probably happy about higher gas prices. For one, “pain at the pump” discourages people from driving, which means fewer accidents. But more importantly, oil company CEOs have become the new “bad guys” of the business world, replacing the insurance execs.

Part of the reason that insurance companies have such a bad reputation is that there are some shady agents out there. There are even some disreputable firms, and not just the fly-by-night companies, either. But in reality, the overwhelming majority of insurance agents are good people, just like your friends and neighbors. In fact, you probably have at least one friend or neighbor who is an insurance agent. And even more so, the vast majority of the major insurance firms are solid, 100 percent ethical companies devoted to servicing the needs of their clients.

What We Have Here Is a Failure to Communicate

So where does this myth come from? Generally, from the public’s lack of understanding just what insurance is and how it works. Schools don’t teach Insurance 101, and this is to the public’s detriment. Then again, since insurance companies are hurt most by the misunderstandings and misinformation, the industry should take it upon itself to educate the public. Until then, here’s a basic primer:

Insurance is pooled risk. The financial risk posed by an auto accident - the property damage, medical bills, legal judgments for “pain and suffering,” etc. - is too great for most individuals to bear. Therefore, people voluntarily opt into insurance pools, wherein they pay an insurance company a “premium” in order to assume that risk on their behalf. This is an important thing to remember - the insurance company is taking risk off your hands, assuming responsibility for the damage you may cause while behind the wheel.

The people who are insured, technically known as “insureds,” hope that they never have to file a claim. They hope that their premiums will be “wasted,” in that sense. But they’re not really wasted - the premiums you pay go to pay for claims filed by other people in your insurance pool. By the same token, any claims you may file and are awarded come from the premiums paid by your fellow insureds.

What About the Bottom Line?

Of course, the insurance business is not a charity. In the American system of free enterprise, the insurance companies deserve to make a profit. In fact, they deserve to make as much profit as they possibly can.

Who’s looking out for you, then? Well, you should be!

The capitalist system works when you make sure that you’re an informed consumer. There are hundreds, possibly thousands of insurance companies out there competing for your business. They will give you the best deal they can because they want your premiums. What’s to stop them from not paying your claims? Think about it - a company that treated its customers poorly wouldn’t be able to survive in a competitive market place, would it? Competition not only keeps prices down, it keeps companies honest too.

The best way to look out for yourself is to review your insurance coverage at least twice a year. Use the internet as a comparison shopping tool. Make the insurance companies compete for your business, not the other way around. In this way, you are in control, and the so-called “bad guys” are at your service.