When you buy an insurance policy, you pay your insurance premium and want to know where that money goes. You don’t file a claim, and you’re just wondering, where does that money go? What’s happening to all those dollars that I gave to them each and every year? It’s really easy to fall into the thought that insurance companies are just taking all the money. That they’re just piling up tons and tons of cash but it’s not the thing at all. We are in a free marketplace, right? and that free marketplace does many different things that help control the costs of different products. One of those things is that we’ve got competition, so they had to keep those costs low, but they started losing clients, we also have to make sure that they’re taking care of your clients because if they don’t win, the clients are going to leave, and then they got to make sure that they’re paying all the different expenses, for buildings, utilities, labor, the payroll, including taxes, they got to pay those things, or people will start leaving them as employees, or they won’t be able to afford a building. All these factors affect an insurance company, and they’re trying to balance profitability and ensure they stay competitive inside the marketplace. What I’m gonna do is, I’m gonna break it down and show you where some of the money’s going. It’s going to be a bit technical, but I will give you some different numbers that will tell you where the money goes. You may be a bit shocked about a few of these numbers. Let’s break it down, we’re going to talk about Auto and Homeowner Insurance.
The Truth Is, Insurance Companies Are Not Magic Buckets
The first thing is to understand that all insurance companies can’t just pay out claims, again and again, and not affect them financially. We’ve seen the state of Louisiana on the homeowner side that we’ve lost six different insurance companies. They’ve gone bankrupt because of massive amounts of claims from hurricanes. The same thing in Texas, we’ve seen quite a few different companies that have left the state of Texas because of the same thing. In the state of Mississippi, we’ve seen companies that have just stopped writing or have also gone bankrupt because there have been many claims for hurricanes in the Gulf state region. So we know it’s not just a magic bucket with an endless money supply. Money also goes out for claims, taxes, payroll, they need to also have a little bit of money for profit so that they can sustain themselves over the period of time that continues to grow. If the bad time comes, they have a little cushion to make it through that bad time. So let’s break down some of the different numbers here.
Let’s Talk About Auto Insurance
30% of every dollar that goes into an auto insurance policy typically goes out as a liability, medical payment claims, or you hit somebody else with your car and cause a bodily injury. 15% goes on to property damage claims, and that’s the same scenario, but it damages their vehicle, their house, or some sort of property. That’s already 45 cents out of the dollar we’re talking about. So what else after that? Well, 18% of it goes to damages for your own car under comprehensive or collision. That’s a windshield, that’s hail damage, it catches on fire, a tree falls on it, you back into somebody else with your own car, and it’s got to be filed on your collision coverage, or you hit the mailbox or something like that. The next thing is going to be all their overhead. Employees’ prices, health insurance, utility bills, electricity, and water gas. For the building they occupy, that’s all those different things, it takes up 23% of the money. Next, they pay an average of 11% in taxes on local, federal, and state payroll. On average, about 3% goes to profit for insurance companies, you might think, “Is it true?” it is a fact, you can Google this and see that on average, about 3% goes to profit. The rest of it is going to just pay the expenses of running an insurance company. You might wonder, “how can that be?” Well, they’re constantly struggling to keep on top of the last couple of years, the cost of homes and vehicles has gone up a lot, new vehicle inventory, and the used vehicle inventory has gotten thin in the last couple of years. The supply chains also have gotten thin, so the price of car repairs has increased significantly, and we are seeing a strain on them.
What About Home Insurance?
It’s a balance between profit and loss, they are trying to always analyze where they’re at, trying to figure out if they can estimate how many claims they’re going to have and how much they’re going to pay in claims every year, so they can reserve that much money. On average, insurance companies shoot for somewhere between 8% to 10% for profit, which leads to 90% for property-related losses, or claims in general, out of that 90% for claims, 98% of it goes to property losses, that’s hail damage to the roof, fire losses, someone backs into your house, water damage because of a water pipe bursts, all those different things takes up 98% of that 90%. Another 2% of it goes to the liability claims, that’s somebody sue you because you hurt them, you physically hurt them, somehow someone comes to your home, and they get sick on the food that you serve, and then they sue you, that’s 2% of that those losses go there. 8% to 10% is what they’re trying to hit as that number was becoming difficult in the last couple of years. We’ve just had so many claims in the Gulf Coast region, to the states of Texas, Louisiana, Mississippi, and Arkansas too, we’ve had several hurricanes, very large hurricanes that have done a massive amount of damage, as Charles was devastated by Laura. This past year, hurricanes does so much damage down to the to the southern tip of Louisiana, and also additional damages over to Texas. We’ve also had that huge ice storm that affected a lot of the region last year. There’s been just tons of claims that have happened, that in this area, there’s been seven insurance companies that have gone bankrupt because they did not have enough money to take care of the claims that were expected. These insurance companies, they’re really good at estimating based off of past history, how many claims they should have in the coming year, what that total dollar amount is, and they usually do pretty good because remember, their profit margin is between 8% to 10%. Whenever we have years like that, it just seriously damages these companies, it’s gonna drive up the costs of insurance because we’ve got less carriers in there and they all just took a serious beating. I hope this has helped you to understand where all the insurance money is going whenever you pay your premium, that really on the homeowner side, 8% to 10% is probably going towards profit and on the auto side, it’s 3% to 5%.
Here at Reed Insurance, we’ve got four promises to you. The first promise is we are going to make sure that your insurance is doing it’s number one job and it is to protect your assets, to make sure that your assets don’t come in danger because you’ve had some sort of a claim.
The second thing is we will make sure that you understand your injury, guaranteeing that you feel good about the purchase that you have made.
The third promise is we’re going to make sure that it fits within your budget and it grows with you as you need it to grow. As your family adapts, evolves, you have children, your children go out of the house, and all those different things or as your income or your property amasses, we want to make sure that your insurance takes care of you, protects you, and fulfills those first three promises.
The last thing is as an independent insurance agent, we represent a lot of companies so we’re going to make sure that you’re fitted with a product that’s going to take care of your needs and whatever life cycle that you’re in right now. Also 10 years from now, as life changes, we’ll make sure that those products adapt to fit you. If your agent is not doing these things for you, then maybe it’s time for you to look for a new independent insurance agent.
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Beaux Pilgrim, CEO