Where your premium dollar goes, who does what with it, and why large cash reserves are important to auto insurance companies.
Auto insurance, it’s part of most people’s monthly bills. Most people pay that insurance bill without giving it a second thought. But what if you did? What if you asked yourself where that money actually goes, and what does it do?
It just so happens we asked the same question.
The following is a generalized discussion of where your premium dollar goes at an auto insurance company. Please remember exact figures vary from company to company, but most follow this formula fairly closely.
The Agent’s Cut
Around 10 percent of your car insurance premium goes to your insurance agent as commission. Agents typically get higher commissions for new business and lower commissions for renewals, but when it averages out it comes out to right around 10 percent with most companies.
Agents are almost always contractors with the insurance company, rarely employees. They are therefore responsible for paying for much if not all of their overhead with this commission. In other words if you like your agent, by all means stick with him or her. That agent sees a direct benefit from your loyalty at least once a year.
But what if you bought your policy online and you don’t have an agent? Well, then that 10 percent either goes back to you as savings, to web sites for referral fees, back to the company, for something else, or a combination of any of the above. Check to see if getting auto insurance through an agent is really that much more. If not, it may be in your interest to have a human on your side rather than a computer.
Keeping the Lights On
Around 25 percent of your insurance premium goes to the insurance company itself to account for its day to day operating expenses. This includes salaries for executives, front office staff and other employees such as claims adjusters. It also includes other overhead such as front office utilities, company fleet vehicle maintenance, and something called “re-insurance,” which is effectively insurance for insurance companies. Pretty much everything the company does except for one very important function falls under this category.
All They “Claim” to Be
That leaves us with around 65 percent left of your premium dollar. Where does that go? Well, what is the most important function of any auto insurance company? Indeed, what is the main reason an auto insurance company exists in the first place? That’s right. To pay for claims!
Like all insurance companies, auto insurance companies are required by state law to keep substantial amounts of cash on hand in what are called “loss reserves” so that they can pay any and all legitimate claims that come their way in a timely manner. In fact, when insurance companies do go into state receivership, failing to comply with this rule is by far the most common reason.
Even for small, regional companies, required loss reserves can easily run in the tens of millions of dollars. Despite that, many companies keep loss reserves well in excess of state requirements to prove financial security with independent agencies such as A. M. Best and others. Suffice it to say, auto insurers take loss reserves very seriously – thus the large amount of your premium dollar they apply to them.
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