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4 ways NOT to save on your insurance (and what you should’ve done) – Part 4 (Severity)   2 comments

Insurance Claim

Sammy attempts to demonstrate a major claim

This week Sammy and I are going to finish up our discussion on how your claims history affects the premium you pay for your insurance policies.  As you may recall, last week we discussed how the number of claims that you file can drive up your premium.  This week, we are going to discuss how the severity (ie – total dollar value) of individual claims affects your premium.

Just a quick search on Google   and you will find there is a lot of information out there about severe (major) insurance claims – the top causes of major homeowner’s claims, other blogs about major insurance claims, and even a website that lists the top 10 biggest insurance claims ever.  When reviewing a large claim, especially in light of your future premiums, companies will generally consider a couple factors.

  • Cause – I’ll make this as simple as possible.  In the event of a large claim, the cause of the claim can be a factor that is considered with regard to premium change – although, this primarily applies to business insurance.  Basically, if you have a large claim, but it’s not something that would be considered “your fault” (ie – a weather claim, an uninsured driver hits you),your agent can make an argument with the underwriter that this large claim was something outside of your control and not easily prevented.  It’s not always successful, but it’s still worth having a discussion.
  • Prior Claims – This ties into cause, in a way.  If you have a large claim, but no prior claims, your agent can again make an argument that this was a one-time event that could happen to anyone, especially if you were not at fault.  It’s definitely not always going to be successful, but it helps.  However, if you have a couple prior claims, regardless of size, it makes it much more likely that you will see a premium increase (or potentially a non-renewal notice) upon expiration of your current term.
  • Loss Ratio – Loss ratio is the calculation a company makes to determine your “net” expense to them.  The most simple calculation takes the total dollar amount paid on every claim you’ve ever had while insured with that company (for THAT particular line of coverage – auto, home, etc), and divides it by the total amount of premium you’ve paid while insured with them (again, for THAT line of coverage).  For example, let’s say you had a $1,000 claim and a $45,000 claim.  You’ve been insured with the company for 25 years, and paid $23,000 of premium.  Your loss ratio calculation would be $45,000 + $1,000 = $46,000, divided by $23,000. $46,000/$23,000 = 2, or 200%.  Another example – the company paid out $8,000 in claims, and you’ve paid in $16,000 in premium.  $8,000/$16,000 = .5, or 50%.   Obviously, the higher your loss ratio is, the more likely it is your premium goes up.  This is one argument for having longevity with a company – the longer you stay, the lower your loss ratio will be – and thus, the greater chance that a loss, even a large one, will not have a dramatic effect on your premium.

One last thought – claim history is something which “travels” with you.  Similar to your driving record with the DMV or your credit score, ALL insurance companies provide claims information with a central database.  When you change insurance companies, the new insurance company will contact the central database and have access to basic information about all of the prior claims that were filed.

In summary – two different factors are the biggest influence on how your claims history can affect your annual premium – frequency and severity.  Obviously, the more that you do to reduce those two factors, the more favorable your insurance premiums will be!  I’ll stress filing numerous small claims – the more small claims that you file, the less flexibility there will be in the pricing of your coverage.

A little dry these last two weeks, but I hope it helps you to understand how insurance works!

insurance blog

Man, I’m worn out! That’s a lot of info

4 ways NOT to save on your insurance (and what you should’ve done!) – part 2   Leave a comment

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The busy blogger!

Good morning one and all!  Sorry about the delay in getting a post up – Sammy’s been one busy blogger!  Too many bones in the fire, I guess.  For part two of 4 ways NOT to save on your insurance, we’ve decided that we are going to discuss removing coverages from your policy or cancelling the policy.

We can both understand the idea behind removing coverages.  Times are tough right now for a lot of people.  You’ve been paying money into a policy that, in most cases, you’ve never used.  You need to cut back on costs – and “why should I keep paying for something I don’t use?”

Here is the main problem with removing coverages from your policy – there could come a time when you DO have a claim, and need the coverage you’ve deleted.  If you’ve removed it completely (or cancelled your policy), then you will pay for your claim entirely out of pocket. 

“Well, I haven’t had a claim in years!”  you say “Why would it be more likely that I’ll have a claim after I remove the coverage?”

“You’re right” Sammy says “removing a coverage won’t increase the likelihood that you’ll have a claim.  BUT, no one schedules when they have a claim – it often happens at the worst time possible!”

Rather than removing a coverage entirely, you should consider other options – increasing your deductible, reducing (but not removing) the amount of coverage, etcThis way, instead of receiving nothing from the insurance company, you will receive a reduced settlement.  Talk to your agent about ways to save on a coverage, rather than just deleting it.  Options available will vary greatly depending on the coverage(s) you are considering.

I hope this helps – and we are always looking for feedback – please ask questions or provide suggestions in the comment section.

We’re here to help you rest easy!!

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