It’s the cry heard across the home and auto insurance industries — save money by switching to a fill-in-the-blank company. Seeing this claim everywhere has caused many of our clients to wonder why that’s seemingly the sole marketing ploy and what’s lying below the surface of this strategy. Let’s take a closer look.
How Do Home and Auto Insurance Companies Make Money?
Probably the best way to understand why money savings on personal insurance policies is one of the top marketing messages you’ll hear from insurance companies is to look at how these companies make money. After all, this is a for-profit industry, so cost savings alone can’t be the only way insurance companies compete.
In the insurance world, there are two core ways that companies make money — underwriting and investment income.
Income From Underwriting
When an insurance company insures a driver and/or homeowner, they take that applicant through an underwriting process. This process allows the insurance company to assess how likely it is that the insured will need to file a claim. During underwriting, the insurance company looks takes certain factors into consideration, such as:
- Previous driving records
- Number of miles driven on average
- Location of a home
- Age of a home or vehicle
- Credit score
- And many other factors
The fewer risky factors a driver and homeowner possess, the more comfortable an insurance company is with offering insurance. That’s because they know there’s less chance of having to pay out on an insurance claim, allowing the company to retain more money.
Insurance companies collect cash on insurance policy premiums minus the money they pay on claims, overhead, and operational costs. That means, the more policies they insure, the larger the pool of money they have to pull from if they have to pay out on a claim.
With the underwriting process, the insurance company is able to offer better savings to attract the less risky drivers or homeowners to their company, building up that pool of cash that’s available to pay out on claims. The more risk-averse policies, the more likely they are to increase their profit margins.
Insurance Investments
When an insurance company wins a new policy, they do not take those monthly premiums and sit on them in a checking account. Instead, insurance companies maximize their revenues by investing the premiums each month.
This investment strategy is another reason why insurance companies want to earn more monthly premiums and are ready to do so by offering savings to the customers. If an investment doesn’t pan out as planned and the company loses money, they know that they can always increase those premiums for their customers, making the investment loss a draw.
Bundling Home and Auto Insurance Policies
Now that you know how insurance companies make money, it’s easy to see why they want to attract more of your business. One of the most popular ways to do that is by enticing you into their organization with one policy and then offering you more savings by bringing all of your policies over into a bundle. This strategy allows the insurance company to gain even more money in monthly premiums, which they can invest, while simultaneously saving their customers money by lowering costs overall.
Are You Ready to Save on Your Home and Auto Insurance?
This marketing strategy ends up working well in driver and homeowner’s favor because it offers a customer-first incentive to attract you to their company. Still, sifting through which insurance company will actually save you money can be difficult. That’s where McGrath Insurance Group can help.
McGrath Insurance Group has a comprehensive understanding of how the various insurance companies operate and underwrite their policies. This understanding will save you time while also helping you get the best policy for your personal needs. Reach out to us to request a proposal to see how much you can save if you switch home and auto insurance companies.
