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The Little Black Box

August 27, 2009
Chris Garlasco, Owner & Managing Partner - Founders Insurance Group

Chris Garlasco, Owner & Managing Partner - Founders Insurance Group

The Little Black Box, as I like to call it, has been the rage in the auto and home insurance industry for some time now. What is it, you ask? It’s a proprietary set of variables that each insurance company uses to determine your rates.

When I started in the industry, we didn’t use computers to determine a rate for your insurance. When a customer walked through the door, we knew after a few brief questions which insurance company would be best for their individual situation and which of the two different rates were going to be applied, a standard rate or a preferred rate. Some of the “cutting edge” companies also had a super
preferred rate. These rates were based on where you lived, your age, what kind of car you drove and how far it was driven to work. Your driving record played the largest part in the equation.

Today, all of the above mentioned items are still factored into your rate; however, depending on your insurance company’s level of sophistication, as many as two hundred other factors can now be part of that determination. Often times, the most important factor is your credit score. As advisors, it presents some challenges when trying to select the best carrier for your situation in a short period of time.

When all of this came about in the early nineties, I was very skeptical about this process, especially the use of a credit score to determine rates. I felt it was an unfair intrusion into the lives of our clients. Now that I have hindsight on my side, I must agree with the Number Crunchers that developed these sophisticated methods of determining risk and assigning price. Although the system still has its flaws, the end result has led to much more stable auto insurance rates. In our state, we seldom see the drastic upward swings in rates that we saw many years ago. Price stability is much more common and rates today, in our state, are generally raised with inflation. Much to my disbelief, the “Black Box” score has proven to be an excellent determination of future loss. In many cases it has led to a decrease in overall rates!

The challenge for agents is explaining the Black Box. You see, like the recipe for Coca Cola, this is a secret that is closely held by each insurance company. In our industry, secrets can often cause distrust. The good news is that so far, the secret “Black Box” appears to be giving the consumer a better defense against wild rate increases. Insurance companies are continuing to seek a better Black Box all of the time and it looks as though it’s here to stay. Hopefully it will continue to benefit the majority of consumers.

Thanks for spending your valuable time with me today!

Chris Garlasco

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