What S&P downgrades mean to auto insurance companies and what you should do about it

Will Some Insurance Companies Crash In 2009?

As we wrap up 2008, we look back at a horrendous year for the U.S. economy. The markets have suffered their worse declines in a generation. Unemployment is higher than any time since the early-Reagan Administration (and climbing), and businesses are folding left and right. Even gigantic insurance companies are struggling to keep business.

Economic Problems Will Affect Auto Insurance Companies

The insurance sector is not immune to economic turmoil. This year brought one of the worst hurricanes in recent memory when Hurricane Ike slammed into Texas. Insurance losses mounted for the major insurers. In addition, we’ve suffered through the most challenging market environment since the 1930s. Insurance companies are now looking forward to a dismal year in 2009.

Standard and Poors (S&P) rates financial services companies in the United States. They recently released their outlook for 2009. According to Insurance Journal,

“S&P notes in its report on North American insurers that in 2008 its outlook on several U.S. insurance sectors was revised to negative, meaning that over the next year to 18 months, more downgrades than upgrades are anticipated.”

These problems relate to the reserves held by insurance companies. Just like small businesses have cash in the bank for a rainy day, insurance companies exist for the rainy day. They must keep cash, bonds, and other securities on hand in case of claims. Most companies hold reserves in the stock market. As the market declined throughout the year, insurance companies’ reserves were depleted. This could pose some challenges for many insurers. Some could struggle – others could fail.

What Insurance Company Problems Mean To Consumers

These challenges are more pressing to those consumers who purchased annuities and other long-term insurance products. For instance, if an insurance company fails, the retiree who bought an annuity from them could lose everything. This is one risk many insurance agents don’t tell you about. According to Annuities for Dummies, 3^rd Edition “If the company fails (a rare event, fortunately) and isn’t absorbed by another carrier, you can lose your money.” (p.137, 2008). That’s bad news for the person responsible for receiving benefits from the annuity, or annuitant.

However, I see a far less risk with a failed auto insurer. For one thing, you’re only out the money you paid in advance to the company. If you normally pay your premiums 6 months in advance, then the worst you could lose is 6 months of premium. Not painless, mind you, but still not as bad as losing $250,000 from a worthless annuity.

What To Do About Your Auto Policy

If you are concerned about the financial well-being of your car insurance company, then you should either switch to a monthly payment plan, or switch carriers. Don’t ignore the problem. At the end of 2008, we may not be through with the credit crisis. Keep an eye on the news to see if your carrier is having solvency issues.

Bear in mind: all of the bank failures in 2008 started out as rumors. We will see problems with more insurance companies in the coming months. The question is when and where they will arise. Thank you S&P for letting us know.

Any thoughts about troubled insurance companies?
Feel free to leave a comment.

How those traffic lights cameras are making drivers think – and keeping down their auto insurance premiums.

Can running a red light jack up your car insurance rates with a simple picture?

Red light cameras can be an annoying invention. For those of us who grew up driving without these mounted traffic cops at every intersection, it can be unnerving for a ticket to show up in the mail a month after you drove down a particular street. No, I’ve never been ticketed this way (at least not yet), but I have fought a red-light ticket and won. But that’s another story. Today, it’s all about red light cameras.

Red Light Cameras

A red light camera is a complex camera system triggered by a car running a red light. The camera does not take continuous pictures, but begins capturing images when a car crosses a “red lit” intersection (is that grammatically correct?). Some cameras even allow a split-second grace period after the light turns red, but I wouldn’t count on it if you’re aiming to beat the system. Red light cameras have been around since the 1960s, but did not become widespread until more recently.

Do Red Light Cameras Make Streets Safer?

Which driver hasn’t thought twice about running a red light because of these cameras? I know I have. Evidently, I’m not alone. According to the Texas Department of Public Safety, red light cameras have reduced collisions by 30% in a sample of 12 cities. This means that more drivers stopped before dangerously rushing through intersections with a red light camera, than in those without a camera.

Whatever annoyances they may cause, I can’t argue with the numbers. Not only do the cameras seem to be reducing collisions, but they also may be reducing traffic related deaths. In 2006, the Insurance Institute for Highway Safety reported almost 900 people were killed in crashes related to running a red light. An estimated 144,000 were injured in the same sorts of accidents. If red light cameras reduce collisions, no doubt they are saving lives too.

Running Red Lights Can Affect Your Auto Insurance

If you get ticketed for running a red light after the camera caught you, your car insurance premiums could be affected. Insurance companies can count moving violations against you in the same way they count an at-fault collision against you.

Most of the time, it only affects drivers who are shopping for auto insurance. Companies pull driving records for shoppers and the prospective company usually finds red light violations. However, those tickets could also affect premiums with your current insurer. Sometimes auto insurers pull driving records at your renewal. If that’s the case, they could find a red light violation and rate you accordingly.

If you find yourself with a red light ticket, then take Defensive Driving to get it dismissed. If you can’t do that, then hope your insurance company doesn’t see it. You’re not obligated to report the violation to your company. Drive safer, keep a clean record, and that ticket will fall off the insurance company radar in 3 years.

But those cameras are not just about car insurance rates. Even if they seem annoying, they’re there for everyone’s safety. Who knows? They may have even saved your life.

Have you ever been ticketed for running a red light or by a red light camera? Leave a comment about your experience.

What is Gap Insurance, how much does it cost, and do you really need it?

Bridging the Gap of Depreciation with Gap Insurance The 360 Bridge - Austin, Texas

Gap Insurance is unlike any other consumer insurance policy. Why? Because it covers the part of your car that only banks would think about: depreciation. That’s the part that goes down every month you own your vehicle. Still confused? Let me explain.

What is Gap Insurance?

You’ve probably heard it said, “once you drive a new car off the lot, it’s worth thousands of dollars less.” It’s true. Say you visit your local Nissan dealership. That new Altima is screaming your name, so you buy it. After handing over your down payment, the salesguy hands you the keys to your new ride. You just bought a $22K vehicle, but once you’re home, you could only sell it for $18,000. That missing $4,000 ($22,000 – $18,000) is the depreciation you incur by merely relocating the vehicle.

Unfortunately, a regular auto insurance policy does not cover a car’s depreciation. If, on the second day of owning your Altima you total your car, the insurance company would only pay you the actual cash value (ACV) for the car, or $18,000. But the bank still wants all the money you borrowed. Where are you going to come up the extra $4K? That’s why you need gap insurance, also called loan/lease gap coverage. If you want to cover the depreciation of your vehicle for the life of the vehicle, then get gap insurance. It sometimes even pays for your deductible.

How Much Does It Cost?

Since you’re not paying to insure your entire vehicle, a gap insurance policy is not as expensive as regular car insurance. However, since the policy is basically all-risk coverage, it’s not exactly cheap either. If you shop around, you can pay a one-time premium of $300 to $700. The price depends on the amount financed and sometimes the terms of the loan or lease. There are caps involved, but most new vehicles are eligible for gap insurance. Check with your finance company for an easy quote.

Do You Really Need Gap Insurance?

There are a couple of reasons why you might want gap insurance. For one, if you owe a significant amount on the car you should consider it. How much money? Dave Hurt, who sells gap insurance with Car Select, says, “Anyone who buys a car and finances 80% of the purchase price should buy Gap Insurance.” That’s probably a good guideline.

Second, you should consider gap insurance if it’s early in the life of your loan or lease. If you owe more money than your car is worth, you’re considered ‘upside down’. Gap insurance could ease you out of an ‘upside down’ situation if you total your car. It may not be required by your finance company, but it’s not a bad decision in certain circumstances.

It’s worth mentioning that gap insurance is not for every car. If you have an older vehicle, gap insurance may not be available for it. Check with the company who writes the gap insurance policy if you’re curious about your particular vehicle.

Finally, check to see if your finance company already includes gap insurance with the auto loan. When I worked with State Farm, their bank automatically included a gap insurance policy for new car purchases. True, their auto loan rates could be higher than dealer financing, but it was an added benefit of their auto loans.

If you have an experience with gap insurance, feel free to leave a comment.