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Mr. Myth Buster!

February 21, 2012

Chris Garlasco, Owner & Managing Partner - Founders Insurance Group

With the advent of unprecedented insurance advertising that started in the late 1990’s many myths have been perpetuated as fact. It’s hard not to turn on the television, listen to the radio or open an internet page without seeing an ad for cheap insurance. There are actual research studies that target the amount of money that needs to be “saved” in order to get you, the consumer, to take action and change insurance companies. I thought it would be fun to take on some myths that have been directly or indirectly created by some insurance companies.

I thought I’d start with the offer of a “free quote.” If you have never heard an insurance company charging for a quote, you are not alone. In the past twenty five years that I have been involved in the industry, I have never heard of an insurance company charging for a quote, yet advertisement after advertisement mentions the fact that you can get a “free quote” from them with the hope that you will respond to the word “free.” Another favorite of mine is insurance companies offering you the prices of their competitors. While insurance base rates are filed with your state’s insurance department and are public, the many variables that go into a company’s pricing are closely guarded secrets. The only way to get a true rate comparison is through an independent agent. Another that doesn’t make me chuckle is that independent agents sell more coverage than needed just to increase their commission. It is possible that a rogue agent exists, but the fact is that no reputable independent agent would offer useless coverage as it’s the fastest way to lose customers. This myth is perpetuated by some of the “800” number companies, the very same companies that are most often guilty of cutting needed coverage in order to make a price appear more favorable. Lastly, the myth that a split limit liability policy is equal to, or better than a single limit policy. This myth is perpetuated by companies that offer only a split (or capped) limit. Independent agents offer both split and single limit policies and make a recommendation based on your specific situation.

Some myths are actually created by the consumer. One that we hear most goes something like this, “my next door neighbor only pays “X” and therefore my policy is too expensive.” The fact is that you and your neighbor can own the very same car, be the same age, drive the same number of miles to work and be with the very same company and the prices can be very different. There are many factors that go into rate making, with some companies having as many as two hundred different rate factors. The price that your neighbor pays has next to nothing to do with your rate. This is true with insurance companies too. There is no such thing as the cheapest company. Every company will be cheaper or more expensive based on the individual risk profile and that’s company’s current appetite. One final consumer myth is the belief that their insurance company operates like a bank account. Not a week goes by that we don’t hear something that goes like this; “I have been paying them for so many years that they owe me.” Your insurance policy is nothing like a bank account where premiums are added up. The insurance policy is (in most cases) a one year contract. In laymen’s terms, you and all of the other folks that insure with a given company essentially pool your money together for the length of the contract. Insurance is the “pooling” of risk to lower the exposure (IE cost) of each person in that group. Your money that is pooled together with others is done with the understanding that some will have a claim and most will not. The insurance company sets a price based on the risk for that year for the people in your pool. You are buying one year of coverage. The myth that is actually spurned by this myth is that the company is simply making a killing on your money. The fact is that most companies that are turning a profit are generally paying out ninety three to ninety six cents for every premium dollar received. The auto insurance market is so competitive that the margins are very thin on each policy holder. Unlike my favorite place to buy a pair of blue jeans, where the price is $75, and a month later, the price has been cut to $50 and then $30 several weeks after that, auto insurance company margins are nowhere close to the margin on my favorite pair of jeans.

I have saved my favorite myth for last. It is the myth that the best way to choose a car insurance company is based solely on the price. Think of your favorite supermarket if you will. When you fill your shopping cart, if you are like most people, some of the items in the cart will be the “store brand” and some will be the national brand. Why? Because we recognize that some things are worth more than others. Insurance companies are no different.

Have a great day!

Chris Garlasco

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