Argumentative Essay: The First Auto Insurance In America
In 1730, the most disastrous fire Philadelphia has ever witnessed ravaged through storefronts and homes on Fishbourn’s Wharf--and from its ashes arose a mighty empire that continues to exist today: the insurance industry (“Philadelphia”). It was this fire that ultimately led Benjamin Franklin to form the first American insurance company in 1752 to be named the Philadelphia Contributionship (“Invented”). This would be an incredibly successful endeavor that would insure homes across Philadelphia against fire hazards for centuries to come, and it would eventually lead to the trillion-dollar era of insurance companies. Everyone has heard of insurance, the most prominent of which being auto insurance, as all Americans who own vehicles are required by law to have it.
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They pay what are known as premiums every month to car insurance companies, and in turn, they receive coverage from those companies if their vehicles are stolen, damaged, or destroyed.
In essence, car insurance companies are basically paid by their customers to take on the risk of a car accident, damaging, or theft because most people do not have enough funds to cover such losses (Hussain). At their source, these companies make money from premiums that they are paid by customers and from earnings from investing those premiums (Hussain). By the same token, the main way in which auto insurance companies lose money is when their customers file a claim, which is sent to that company by a customer stating that their car has been damaged and that they would like for that company to cover the damage. At the end of the day, these three aspects of car insurance companies often determine if they succeed or not. Therefore, the driving force behind the success of auto insurance companies is their risk management in those three areas: in setting premiums, paying claims, and making
investments.
Before beginning, it is important to understand what risk management is. According to The Economic Times, risk management is the process of identifying risks in advance and then taking steps to avoid or minimize the impact of that risk ("Definition"). Managing risk can also be described as retaining a balance between risk and profitability. While many people believe that risk is a bad thing, it is actually crucial to the success of any business because high risks usually come with high rewards. On the other hand, these high rewards often come at a high risk, so it is of vital importance to manage that risk by retaining a balance between risk and reward.
That being said, the first area in which auto insurance companies manage their risk is in setting the premiums that clients must pay. Car insurance professionals pour over data for hours to determine and evaluate the risk that each client poses to them, and they then set a premium based on that determined risk to remain profitable (Hussain). This process of risk management is known as underwriting, and it is pivotal to the success of auto insurance companies. It increases revenue with the risk of added expense and therefore softens the blow that the potential risk of losses could have on insurance companies (Hussain). For example, take a risky policyholder paying $1,000 a month in premiums to a car insurance company and who has an accident after just ten months that costs that company $10,000 to cover. Then, by the end of those ten months, that insurance company will have generated $10,000 in revenue from the policyholder and lost $10,000 to cover the accident. This would make it so that the company will have generated no profit from that risky client because they were riskier and had a crash so early on. On the other hand, if the insurance company had charged the same policyholder $2,000 a month in premiums, then even after the $10,000 accident, they would still have $10,000 in profits because they would have gotten $20,000 in premiums from those ten months and only lost $10,000 for the coverage of the accident. From this example, it easy to see how managing risk by setting a client’s premium based on their risk level has a huge effect on the profitability and success of any auto insurance company. And setting that premium is no easy task—car insurance companies use many factors to manage risks by determining the rates of each of their customers. These main factors that are used for this essential risk management are gender, age, stability and past records, location, and the condition of a client’s vehicle.
First and foremost, car insurance underwriters manage risk by considering gender when setting premiums. For example, an eighteen-year-old male living in Nevada would pay $6,268 a year to ensure a sedan, while his twin sister with the same driving record would only pay $4,152 a year (Kristof). This is because men, in general, are riskier because they are 241% more likely to drive recklessly, 209% more likely to have a DUI, and 75% more likely to speed than women ("Male"). On top of that, men are involved in 2.5 fatal crashes per hundred million miles traveled, while women are only involved in 1.7 fatal crashes per hundred million miles traveled ("Male").
A second factor that auto insurance underwriters take into consideration is age. Going back to the example of the Nevadan twins, as they turn 21 and begin to ease into their midlife years, their car insurance premiums shoot down from $6,268 to $2,696 for him and from $4,152 to $1,824 for her (Kristof). This is because middle-aged individuals present less risk to car insurance companies. In fact, on average, the men's number of fatal crashes per hundred million miles traveled decreases by 5.2 from ages 16-19 to ages 20-29, and the women's number of fatal crashes per hundred million miles traveled decreases by 3.3 from ages 16-19 to ages 20-29 ("Male"). However, as those middle-aged customers reach a “senior citizen” status, their auto insurance premiums will rise again because they are more likely to have an accident (Bosari). In fact, on average, people who are age 70+ have 2.7 times more fatal accidents per 100 million miles traveled than those who are ages 30 to 59 (“Male”).
Third, auto insurance companies manage risk by setting premiums based on customers’ stability levels and their past driving records. Auto insurance rates are 68% lower for the married woman with a college degree, a professional job, and a home than the single woman with a high school diploma who rents her home in a moderate income area (Bosari). The reason why premiums are so much higher for the moderate income woman is because car insurance companies view her as a higher risk and the higher income woman as a lower risk. Car insurance companies also determine customer premiums based on their past and current records. Multiple speeding tickets and DUI's on the behalf of a customer leads to higher insurance premiums (Bosari). Another tool that car insurance companies look at when underwriting is credit score (Connel). In fact, 92% of all insurance companies use credit when calculating premiums (“Credit”). The lower a customer's insurance score, the higher their premiums (Kristof). In addition to credit scores and driving records, auto insurance companies also take profession into account when determining rates. Some customers with certain professions will have higher premiums because their profession increases their risk of getting into an accident (Botkin). For example, delivery drivers and journalists will be on the road more, so they have a higher chance of getting into an accident, whereas airline pilots just drive to the airport and back, so they are a lower risk (Botkin).
Lastly, car insurance underwriters take condition and model of a client’s car into account when setting premiums. First, they set premiums higher for larger cars because they tend to be less safe in the event of an accident (Botkin). Second, vehicles with higher safety ratings have lower insurance rates because they are less risky (Botkin). Third, older vehicles have higher premiums because they are more likely to be completely destroyed in an accident, which means that the auto insurance company of the owner with have to buy an entire new car instead of repairing it (Botkin). Last, car models, such as the Honda Accord and Chevrolet Impala, that have historically been stolen than other models have higher premiums (Botkin).
As shown above, auto insurance corporations take many factors into account to evaluate the risk that each of their clients presents and then set a premium based upon that risk. And the factors above are just scratching the surface of how much underwriters take into account to set the perfect premium. Even location is used to set premiums. In fact, a driver in Philadelphia might pay $4,142 annually for car insurance, while a similar driver nearby in suburban Bensalem, Pennsylvania, would pay only $2,364 (Wiener). From previous data like these, these companies can induce that their male clients, old and young clients, unstable clients, clients with bad records, and urban clients present them higher risk. This means that these customers will likely file more accident claims than other customers and that they will thus cost car insurance companies more money. Therefore, auto insurance companies raise the premiums of these risky customers to compensate for those future losses that they are likely to bring. That compensation is ultimately what allows car insurance companies to be both profitable and successful.
They pay what are known as premiums every month to car insurance companies, and in turn, they receive coverage from those companies if their vehicles are stolen, damaged, or destroyed.
In essence, car insurance companies are basically paid by their customers to take on the risk of a car accident, damaging, or theft because most people do not have enough funds to cover such losses (Hussain). At their source, these companies make money from premiums that they are paid by customers and from earnings from investing those premiums (Hussain). By the same token, the main way in which auto insurance companies lose money is when their customers file a claim, which is sent to that company by a customer stating that their car has been damaged and that they would like for that company to cover the damage. At the end of the day, these three aspects of car insurance companies often determine if they succeed or not. Therefore, the driving force behind the success of auto insurance companies is their risk management in those three areas: in setting premiums, paying claims, and making
investments.
Before beginning, it is important to understand what risk management is. According to The Economic Times, risk management is the process of identifying risks in advance and then taking steps to avoid or minimize the impact of that risk ("Definition"). Managing risk can also be described as retaining a balance between risk and profitability. While many people believe that risk is a bad thing, it is actually crucial to the success of any business because high risks usually come with high rewards. On the other hand, these high rewards often come at a high risk, so it is of vital importance to manage that risk by retaining a balance between risk and reward.
That being said, the first area in which auto insurance companies manage their risk is in setting the premiums that clients must pay. Car insurance professionals pour over data for hours to determine and evaluate the risk that each client poses to them, and they then set a premium based on that determined risk to remain profitable (Hussain). This process of risk management is known as underwriting, and it is pivotal to the success of auto insurance companies. It increases revenue with the risk of added expense and therefore softens the blow that the potential risk of losses could have on insurance companies (Hussain). For example, take a risky policyholder paying $1,000 a month in premiums to a car insurance company and who has an accident after just ten months that costs that company $10,000 to cover. Then, by the end of those ten months, that insurance company will have generated $10,000 in revenue from the policyholder and lost $10,000 to cover the accident. This would make it so that the company will have generated no profit from that risky client because they were riskier and had a crash so early on. On the other hand, if the insurance company had charged the same policyholder $2,000 a month in premiums, then even after the $10,000 accident, they would still have $10,000 in profits because they would have gotten $20,000 in premiums from those ten months and only lost $10,000 for the coverage of the accident. From this example, it easy to see how managing risk by setting a client’s premium based on their risk level has a huge effect on the profitability and success of any auto insurance company. And setting that premium is no easy task—car insurance companies use many factors to manage risks by determining the rates of each of their customers. These main factors that are used for this essential risk management are gender, age, stability and past records, location, and the condition of a client’s vehicle.
First and foremost, car insurance underwriters manage risk by considering gender when setting premiums. For example, an eighteen-year-old male living in Nevada would pay $6,268 a year to ensure a sedan, while his twin sister with the same driving record would only pay $4,152 a year (Kristof). This is because men, in general, are riskier because they are 241% more likely to drive recklessly, 209% more likely to have a DUI, and 75% more likely to speed than women ("Male"). On top of that, men are involved in 2.5 fatal crashes per hundred million miles traveled, while women are only involved in 1.7 fatal crashes per hundred million miles traveled ("Male").
A second factor that auto insurance underwriters take into consideration is age. Going back to the example of the Nevadan twins, as they turn 21 and begin to ease into their midlife years, their car insurance premiums shoot down from $6,268 to $2,696 for him and from $4,152 to $1,824 for her (Kristof). This is because middle-aged individuals present less risk to car insurance companies. In fact, on average, the men's number of fatal crashes per hundred million miles traveled decreases by 5.2 from ages 16-19 to ages 20-29, and the women's number of fatal crashes per hundred million miles traveled decreases by 3.3 from ages 16-19 to ages 20-29 ("Male"). However, as those middle-aged customers reach a “senior citizen” status, their auto insurance premiums will rise again because they are more likely to have an accident (Bosari). In fact, on average, people who are age 70+ have 2.7 times more fatal accidents per 100 million miles traveled than those who are ages 30 to 59 (“Male”).
Third, auto insurance companies manage risk by setting premiums based on customers’ stability levels and their past driving records. Auto insurance rates are 68% lower for the married woman with a college degree, a professional job, and a home than the single woman with a high school diploma who rents her home in a moderate income area (Bosari). The reason why premiums are so much higher for the moderate income woman is because car insurance companies view her as a higher risk and the higher income woman as a lower risk. Car insurance companies also determine customer premiums based on their past and current records. Multiple speeding tickets and DUI's on the behalf of a customer leads to higher insurance premiums (Bosari). Another tool that car insurance companies look at when underwriting is credit score (Connel). In fact, 92% of all insurance companies use credit when calculating premiums (“Credit”). The lower a customer's insurance score, the higher their premiums (Kristof). In addition to credit scores and driving records, auto insurance companies also take profession into account when determining rates. Some customers with certain professions will have higher premiums because their profession increases their risk of getting into an accident (Botkin). For example, delivery drivers and journalists will be on the road more, so they have a higher chance of getting into an accident, whereas airline pilots just drive to the airport and back, so they are a lower risk (Botkin).
Lastly, car insurance underwriters take condition and model of a client’s car into account when setting premiums. First, they set premiums higher for larger cars because they tend to be less safe in the event of an accident (Botkin). Second, vehicles with higher safety ratings have lower insurance rates because they are less risky (Botkin). Third, older vehicles have higher premiums because they are more likely to be completely destroyed in an accident, which means that the auto insurance company of the owner with have to buy an entire new car instead of repairing it (Botkin). Last, car models, such as the Honda Accord and Chevrolet Impala, that have historically been stolen than other models have higher premiums (Botkin).
As shown above, auto insurance corporations take many factors into account to evaluate the risk that each of their clients presents and then set a premium based upon that risk. And the factors above are just scratching the surface of how much underwriters take into account to set the perfect premium. Even location is used to set premiums. In fact, a driver in Philadelphia might pay $4,142 annually for car insurance, while a similar driver nearby in suburban Bensalem, Pennsylvania, would pay only $2,364 (Wiener). From previous data like these, these companies can induce that their male clients, old and young clients, unstable clients, clients with bad records, and urban clients present them higher risk. This means that these customers will likely file more accident claims than other customers and that they will thus cost car insurance companies more money. Therefore, auto insurance companies raise the premiums of these risky customers to compensate for those future losses that they are likely to bring. That compensation is ultimately what allows car insurance companies to be both profitable and successful.