Understanding Insurance

Blog → Post by Todd Rehrig January 14th, 2013

Insurance Basics

In order to understand why you pay what you do for insurance, the first step is to grasp what insurance is.  In simple terms, insurance is simply a means to pass a risk on to someone else, most often, the insurance company.  There are risks involved with driving a car, and most of us couldn’t afford to pay the costs involved in the event of an accident.  Therefore, we agree to pay a monthly fee in order to have the insurance company assume this risk.  The same holds true for other types of insurance such as home, life and health.
The insurance industry has evolved drastically over the years, but its primary goal has remained the same; to cover the risks it assumes while also being able to cover its own expenses and make a profit.  The profit portion is what makes most people cringe and gives the industry a bad vibe.  However, consumers have the greatest impact on the premiums that companies charge.

A company’s profits equal the money (premium) collected plus investments made minus the claims paid and underwriting costs.  This is a delicate formula and a constant battle for the companies to analyze.  With so many competitors in the industry, the carriers try to keep their premiums as competitive as possible in order to attract more business.  When the market is strong, companies can make money on investing the premium they collect to help offset the costs.  In today’s economy, however, they need to rely on keeping the claims they pay less than the premium they collect.

Claims paid are the biggest factor in our insurance costs.  Claims not only cost a company in the money they pay out, but also in paying adjustors, investigators, lawyers and other personnel behind the scenes.  A $10,000 claim costs the insurance company more than that to process.  However, legitimate claims are factored into the companies’ equations and can be predicted, but issues such as fraud create the most problems.

Fraud is the biggest concern and costs insurance companies billions of dollars each year.  According to the FBI (http://www.fbi.gov/stats-services/publications/insurance-fraud) , over $40 billion is incurred annually and the average family spends an extra $400 to $700 per year because of it.  We could put hundreds or thousands of dollars back in our pockets if we could control insurance fraud.  The point that most people ignore is that when someone commits insurance fraud, they’re not ripping-off the insurance company; they’re ripping-off you.  We’re the ones who will have to pay for this theft in the long run.

In future posts, I’ll discuss in more depth what we can all do to help lower our insurance costs.  I’ll also review what the coverage means on your policy and how to determine if you need everything you’re paying for.  Knowledge is the key to making the best decisions for ourselves and our loved ones.

Click here for a free auto insurance quote by Shirley Katz Insurance Inc.


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