Almost everybody who owns a car in the U.S. buys auto insurance. (Those who don’t are breaking the law.) The main reason for buying auto insurance is that first, the U.S. law requires that a person have it to legally operate a car. The second reason is that it protects the policy holder from major loss in the event he gets in an accident. Should he have an accident and incur damages to his and another person’s vehicle, the insurance company will pay him all or most of the funds necessary to make the necessary repairs, thus protecting him from a lot of financial strain.
To back step a little, let’s just look at insurance. What is insurance? We might say it’s a device that allows economic equilibrium for a person in the event of loss. That’s what it is from the policy holder’s perspective. Should he have an accident, have his car stolen, etc. he doesn’t find himself faced with large, immediate financial obligations. In many ways, by paying his regular premiums to the insurance company, he is slowly paying for a claim that may occur down the road.
Now from the insurance company’s perspective, what they concern themselves with is risk and reward. Risk is the amount of money the insurance company agrees to pay in the event of a claim, and their reward is the premium the customer pays to them, the insurance company. To the insurer, risk must always equal reward.
Let’s look at an example of risk. From experience over the years, insurance companies have discovered that people with low credit scores are a greater risk to them than those with higher credit scores. They have found that people with low credit scores have a predisposition to open more claims than those with higher scores. Thus, in order for risk to equal reward, the insurance company charges more money to individuals with low credit scores, since those types will open more claims, thus incurring more risk (payouts) for the insurance company.
So, that’s a quick look at auto insurance and what it’s all about. All too many people think that money is the chief concern with insurance companies, when in fact, the key concern for them is risk and reward which always have to be equal. We hope this gives you a better understanding of auto insurance.
Leo Simental
