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How to Select your Insurance Company.

Posted by on Apr 17, 2013 in Perfect questions, Personal Finance | 2 comments

insurancelogosHow insurance conceptually works.

The insurance companies collect premiums in advance to cover certain risks.  The risks covered and the liability limits are defined in the declaration of coverage.  With these collected premiums the insurance company then pays current claims and other expenses (such as advertising).  The remaining balance of premiums is invested and held in reserve for future claims.

Basic Insurance Company Income Statement:

Income
Revenue from Premiums _____________
Income from investment of Reserves _____________
Total Revenue ________________
Expenses

Customer Acquisition

_____________
Payment of Claims _____________
Overhead _____________
Total Expenses ________________

 

 

Insurance companies fall into two main groups:

  1. For Profit (These have owners who expect a return for their investment): State Farm, Allstate, Progressive, Geico,
  2. Cooperatives, or Mutuals (These don’t have owners, the policy holders are the stakeholders): USAA, Nationwide, Hastings, most Farm Bureaus

Theoretically the Mutual companies should be of greater value to customer, as the customer are the owners.  However, profits are only one component of the various factors that determine total value to the insured.  I am not for or against either type of insurance company and you can find great value in either type of corporate structure.

Now we will go through each line of the income statement and discuss the strategies implemented by those insurance companies

Premiums:
Several companies utilize a core marketing strategy that focuses on the lowest price for their policies.  Progressive utilizes this strategy the most.  They encourage you to compare rates (although it is not a simple process). Usually they are the lowest priced option (perhaps you are getting what you pay for?). This is a great marketing strategy, hoping the consumer views it an apples to apples comparison.

Not all apples taste the same.  Just like there are several attributes to creating a great tasting and nutritious apple.  There are other attributes that reveal the total cost of your insurance not just your upfront premium.

Investment returns on reserves
As a general rule the investment returns are relatively similar for different companies.  However, are those returns utilized to provide more value to the customer, paying shareholders, or paying one of the other expenses discussed below.

Note: Warren Buffet uses insurance reserves to fund many of his investments through Berkshire Hathaway (owner of Geico and several other insurance companies).

Customer acquisition costs
Traditionally all insurance companies would work through insurance agents. However, that has changed over the last couple of decades. Several companies now offer you the option to buy directly from them via the internet or over the phone.

Agents:
There are two types of agents Independent and captive.  A captive agent sells the products of one company.  All State, Farmers, and State Farm are good examples of this strategy.  Independent agents represent several companies in each category of insurance they provide.

Components of Acquisition costs:

  • Agents or staffs to handle direct sales
  • Advertising (all those ads at our favorite sporting events are not free)
  • The more they spend on advertising the less they can spend somewhere else

Claims expense
This entails all components of paying a claim such as:

  • Cost of the adjustor
  • Cost of the staff to process claims
  • Fraud (some people file fraudulent claims some companies can be more susceptible to this which raises their costs)
  • Legal defense fees (when those attorney’s you see on TV sue to get more money)

    One of my Favorite Insurance companies

    One of my Favorite Insurance companies

So far in my life I have experience 5 different companies insurance claims process.  I was very satisfied with several of them.  However, my experience with Progressive was awful.  They paid me wholesale value for my car, and were very nasty and rude throughout the process.  In comparison my experiences with All State and Hastings were phenomenal.  They made frustrating situation as easy as possible for me.

Some companies focus on low premiums prices to attract customers, then they fight to not have to pay their customers when there is a claim.  A little research on the internet will go a long way in helping you determine how the claims experience is for different companies.  Most purchasers fail to examine this component of their coverage.  This is the difference between a cheap blah tasting apple and that succulent full flavored apple.

Overhead
This includes things like buildings, utilities, some staff, and regulatory compliance.  A well-managed company can keep these costs down.  These enables them to provide more value to you.

Conclusions:

  1. Next time you pick an insurance company look at the entire picture.
  2. Ignore cute lizards, cavemen, and annoying spokespeople.
  3. Research the customer opinions on their claims process.
  4. Determine their corporate structure.

I choose to mostly work with independent agents (although I have several properties insured through a captive agent with Kentucky Farm).  I also prefer to work with well-managed mutual companies (such as Kentucky Farm and Hastings).

Question:

Are you an agent… Give me your opinion in the comments below.

What are your experiences?  Tell us about it.  Help the rest of us make a more informed decision.

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  • Melanie Collicott

    JB, I am so impressed with your vast knowledge of the insurance industry. I bet there are many agents who don’t know this much about insurance and how it works. Thank you for speaking so highly of Hastings Mutual Insurance. I feel they are one of our best options for our insureds.
    Melanie Collicott
    Collicott & Associates Insurance

    • http://www.joshuabfarrell.com/ JB Farrell

      Melanie, if you ever want to share other things people should know about the insurance industry, I would love for you to write an article on it.

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