Why do car insurance rates vary so widely?

I just received quotes from two reputable insurance companies for 6 month comprehensive coverage for two vehicles. One company, 2097 dollars. The other, 806 dollars. Equal coverage, equal deductibles. Exactly what is causing that huge difference? I’m sure a different person with different driving history and coverage rates, etc. would have the companies reversed, and the “cheap-for-me” company would be outrageously expensive for him. If one company determines they’ll be able to make a profit from me by charging X, why would another company determine they need to charge 2.5X?

I noticed this too when shopping around for car insurance - every company had a wildly different rate.

I expect what is happening is that each company has a wildly different formula for calculating how risky you are. Maybe one company attaches a huge premium increase to having traffic tickets. Maybe another company thinks you picking a gray Toyota Corolla over a red Ford Mustang makes you a dull and less risky driver, despite having some traffic tickets. When you add up all the things they look at you could end up with wildly divergent premiums.

So for you specifically company A charges $2097 and company B charges $806. But a different person may experience company A charging $900 and company B charging $2100. Taking the average cost per company for both these companies may show them to be pretty consistently priced.

I think that is why every car insurance ad is of the form “person X saved $500 when switching from B insurance company”. It probably was true for a specific person, but another person could see such a savings switching the other way.

Underwriting: Different companies have different philosophies about what matters when it comes to determining risk. Some care about the color of the car, some care about your credit score, some rates drop by as much as 50% when a guy turns 25–as if he became more careful overnight.

Marketing: Companies who have made a commitment to growth will offer artificialy lower rates to attract new business and retain existing customers. This is a risky proposition as most of a company’s losses will occur with new business. Sometimes it pays off, sometimes not. This strategy also works if a very large company wants to thwart a smaller one’s effort. Basically it comes down to “who can hold their breath the longest?” The game is not as unbalanced as it appears. The large company, in luring business away from the ambitious upstart, also sucks in a lot of trash along with the gravy which hurts their bottom line later on.

Financial Strength: It’s been a rough couple years economically. Insurance companies store a lot of their cash in the stock market. How they’ve weathered the last 18 months has a lot to do with their ability to pay claims. If they got hosed, then they need to take in more premiums in order to remain solvent. If they did alright, they get to enjoy lower premiums than their competetors and can keep writing new business with a minimum of volatility in what they have to charge.

There are other factors, too. But what it comes down to is, if you’re an insurance company you’re going to be the cheapest sometimes, and at others you’re going to be the priciest. That’s just how the game goes. What you, as the consumer, need to do is to think longer term:

Who has the best “accident free” discounts? Companies will reward long-time customers, who don’t have significant claims, with discounts. I’m getting 20%. When I shop it (not that I’d ever change) nobody’s “new customer” premium even comes close to being as low as mine.

Who’s definition of “customer service” most closely matches yours? Some companies have agents, some have a better online presence, some are dirt cheap because they don’t have all that “customer service overhead” but are impossible to contact.

Are you sure it is equivalent coverage? Check the small print.

Not all insurance in created equal, even if it is technically for the same level of coverage. For example, the lower priced auto insurance may have provisions allowing repairs to be done with used parts (such as those salvaged from an auto wrecker), or at a facility of the repair company’s choosing (which is unlikely to be the best in town).

I deal with insurance claims from time to time at my shop.
Let me tell you there is a world of difference between how a policy holder from one of the majors and somebody that bought the cheapest thing on the internet are treated. Stuff that the majors will cover without blinking an eye become a long drawn out problem and often a denial with the cheap carriers.

And then there is something I’ve been through twice … call up, get a quote, buy the insurance, and then get a bill in the mail a week later for more money because the original quote was “incorrect”.

Anecdote, plural, not, data, and all that – but I saw a guy once get lousy quote after lousy quote before getting a pretty decent one; the explanation? He had a lot of tickets, which apparently made most companies pull out the big guns right then. These folks, though, checked to see what the tickets were for; turns out the guy had, repeatedly, not had his license on him upon getting pulled over.

Which, y’know, they didn’t approve of, but it’s not like that actually makes him any worse a driver; he wasn’t running red lights or speeding through school zones or whatever, and so they shrugged and offered him the same price as a guy with no tickets on his record.

Progressive.com - Why do insurance rates vary?

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It’s a fierce market out there. Too much gravy in your premium and you’ll have trouble competing.

I had to make a claim recently for something I was 100% not at blame over (gas station was selling an 80/20 gas/water mix). I have my insurance with one of the big guys - the check was at the shop within an hour of the bill being finalised. It took five months for Bubba’s Insurance ‘n’ Tackle shop to get around to paying up.

Really? You need a cite? Alright, GEICO has made an underwriting profit in 13 of the 14 years that Warren Buffet’s Berkshire Hathaway has owned it. In fact Warren gives an excellent overview of how his company made its money last year. http://www.berkshirehathaway.com/letters/2009ltr.pdf

It is true that the insurance company can also make a great deal of money off of the premiums before they are paid out as claims (termed float) but underwriting profits are essential to long term survival. One need only review the annual report of any public insurance company to see how just how meaningful underwriting profits or losses are to the bottom line.