Are you paying for your Neighbor's insurance? Quite possibly!
Originally posted on BraunAgency.com
An Industry Secret
I’m going to let you in on an insurance industry secret. Insurance companies are scared to insure property. Insurance companies might not openly admit this fact, but the industry really isn't crazy about insuring homes and other property. (Ever wondered why GEICO and Progressive doesn't have their own home insurance product?) You see, insurance companies really like predictability. Predictability allows insurance companies to accurately project how much they will pay in claims on a given set of cars or homes or lives or whatever it is they’re insuring. Having a reasonable certainty about how much they will pay allows them to correctly price the insurance policies and make a small profit.
Yes, small profit
While insurance companies can generate millions of dollars in profit, the profit margin on the premiums they receive is very small. Sometimes, the profit margin, after paying claims and expenses is zero or even a loss. In some cases, the lack of profit is offset by investment returns. In other cases, insurance companies have to dip into savings (they call it reserves) to cover the deficit. Generally, companies in the industry are pleased if they keep a nickel of profit for every dollar in insurance premiums. But I digress.
Predictability
Again, predictability is what allows insurance companies to accurately price risk and set a competitive rate that attracts and retains customers. (Stick with me, the main point is coming). Car insurance is a very predictable coverage compared to property insurance. Insurers have gotten really good at aggregating data and predicting car insurance losses, which is why it’s also a very competitive product line and billions of dollars are spent each year to obtain new customers. (According to a report by SNL, the top ten advertisers spent almost $4 Billion in advertising in 2013. That represents almost $20 for every licensed driver in the United States! And advertising expense has increased in the past 4 years)
Storms are not predictable
But here’s the deal, home insurance (and other property) is less predictable and more volatile. Insurance companies can accurately predict some coverages on a home policy, such as often fires will occur. But they cannot predict with any level of confidence how much storm damage will occur in a year’s period of time. They try their hardest, but Mother Nature can be very uncooperative and very unpredictable. We may go for an entire hurricane season without a major hurricane making landfall. Or, we may have several devastating storms hit in one year.
Why it Matters to you
In coastal markets, where an unpredictable hurricane can wreak havoc, insurance companies have taken efforts to reduce their exposure to storms by not taking on new customers, getting rid of some higher-risk customers, and implementing higher deductibles for hurricanes or wind. Some insurance companies don’t have the size (or enough reserves) to insure homes in coastal markets without putting the entire company at risk of going out of business… or the willingness to figure out how to do it… so they avoid it altogether. However, many companies see an opportunity and recognize that in order to insure your cars, they need to be willing to also insure your home. In essence, they want to insure your cars and are willing to insure your home to do it. But most companies aren’t terribly interested in just insuring your home. So what do they do?
Insurance companies give money back
The best way for insurance companies to encourage clients to place both home and auto insurance with them is to offer large bundling discounts. In essence, the bundling clients are being subsidized by non-bundling clients. If a home "risk" should cost $1000, a bundling client may pay $800 and a non-bundling client may pay $1200. (Not real numbers, for example only) The point is that the difference can be significant, especially in coastal markets where property insurance costs much more than non-coastal areas. You are almost undoubtedly getting lower coverage at a higher cost if you have two different companies for your home and auto, than if you bundle them. (Note: Car insurance companies like GEICO and Progressive and Elephant might sell home insurance but they're selling other insurance companies, not their own, and while you might get a small discount, you’re not getting a full bundle discount because the home insurance isn’t actually through GEICO or Progressive or Elephant. They might make it sound the same in their advertising, but look at the actual discount and you'll see that it's not.) If you carry different companies for home and auto, you are basically paying more for your home coverage so that your neighbor can pay less. If you’re not bundling, you’re paying for part of your neighbor’s policy, who is bundling.
The bottom line
Bundle and save. It’s almost always in your best interest.
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