Insurance off the Shelf

There’s no arguing that it would sure be convenient to buy insurance off the shelf at your local big box store. While the internet has definitely made insurance more accessible, and easier to shop for, we’re still far away from it showing up on the shelf. I believe we’ll never get there.


One of the scenarios I get all the time is people wanting to know why they’re paying something different than their friend or neighbor, for what seems to be the same product. If you understand how insurance is priced, and how it’s changing, then you’ll understand why people pay different rates.

Insurance companies develop prices one of two ways. They either underwrite or rate. Underwriting is becoming less and less common as time goes by. It’s a labor intensive process that relies on judgment. When a company underwrites for price they’re using a few broad “buckets” to base their rates on, and treating each variable as a separate pricing variant.

Example: Let’s assume that the ideal driver for an insurance company is a married female, age 35, with a perfect driving record and a minivan. This isn’t too far off, by the way. If an insurance company were to underwrite another driver with all the same characteristics, except for a corvette instead of the minivan, what they would do is look at the number of corvette loses, presumably higher than minivan loses, and offer customer 2 a higher rate.

This seems logical. What underwriting fails to do though, is entertain the possibility that two, or more factors, could actually impact each other. When all you do is raise rates due to car and not look at all the factors together, you create broad price points. These broad prices end up charging some drivers too much and other too less. This wasn’t a problem twenty years ago, because insurance companies were taking most of the money collected in premium and investing it to earn interest. So you may be asking yourself, why an insurance company would care if they are overcharging for insurance, that’s just bonus for them, right. Well yes, but what it does is leaves open the possibility that another company is going to have the right rate for that driver, and the insurance company lose them all together.

If there were a lot of people being undercharged for insurance, they would just make it up with their investments. Two things have caused this to change within the last few years. First, the stock market as become so volatile that companies can no longer be certain that they’re going to get a good return. Second, and more importantly, the speed in which we can collect and analyze data has increased so dramatically, that insurance companies can now offer almost anybody the correct price for them, not just their “bucket”.

This is called rating; looking at many different factors and seeing if any of them work together to change the price. For example, what if in our previous example we learn that it’s not the car that is responsible for higher or lower losses, but in fact the marital status and age in tandem. When all you do is look at the corvette and say losses are higher in a corvette than a minivan, you leave out the possibility that even though the corvette has more accidents, middle aged, married, females cause very few, regardless of the car they drive.

Throw in credit, insurance history, and prior insurance limits as rating factors and you can see how two very similar people can actually have very different rates.

If you need help understanding your rate, or want to compare it one of the top companies that I work with, give me a call 636-449-2613.