3/14/08

Why do some car insurance companies only write six month policies?

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I don't think there's any reason except that they like to be able to raise their rates that often.


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In a broader sense, it is so the company can reevaluate its risk and adjust your rate properly. Sometimes your rate may go up at the six month point and sometimes it may go down.

If you only could purchase a 12 month policy a company would be more inclined to charge more to cover the possibility that they would be assuming additional risk.



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In response to your question, I have to first assume that Roy has no idea how insurance works, although Nicholas is right on track. A lot of times, rates change, up or down, and this gives the company the chance to either please you, or piss you off, neither of which is their ultimate goal. They are running a business, and just like all other businesses, they must make sure they don't go bankrupt, and that means raising rates when they pay out too many claims. Simply put, each company can do what they want, but I wouldn't recommend basing a large portion of your decision on this fact. Check out www.iii.org (Insurance Information Institute) for more info as they have large quantities of pertinent info when shopping for insurance and you aren't sure how the system works. any questions, email sjinsurance@gmail.com


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Hey, Sean, my answer was the same as yours. Except I guess it is POSSIBLE that they will reduce their rates but I've never seen that happen on an auto policy.



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I have seen auto insurance companies reduce rates...espically in NY. NY is one of the most expensive states for auto insurance. I do believe that 6 month polcies are issued in order to controll cancellations, prevent fraud and adjust the policies of the "bad drivers" so that the "good drivers" can catch the premium break that they deserve.


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It all has to do with what insurance is. Insurance is the transference of risk. You pay a premium to the insurance company, it turn they agree to indemnify you, or put you back to the financial status you were previously at prior to a claim within the limits you have selected. In simple terms you hit someone and owe for damage to his car, his injuries, damage to you car, and your injuries. Assuming you have all the coverages needed at the limits needed the insurance company pays for all this so you are now at the same place financially you were prior to the accident. That being said the, money you pay in premium is for the possibility of a future claim, not claims already paid. This insurance company must predict how much money will be paid on average for the next policy term for a pool of risk. It�s like selling a product without knowing how much it will cost you to produce until after you have already sold it. Knowing this, it�s amazing insurance companies know how much to charge. Charge too much and you�ll lose customers to more competitive companies. Charge too little and you loose the company. You have to be as accurate as possible. This is why no insurance company should want to charge too much or too little. Auto insurance is so dynamic that it is almost impossible to predict more than six months in the future how much will be paid in claims. Variables such as people moving from one place to another, explosions in popularity of more destructive vehicles like SUVs, changes in driving habits like driving while talking on cell phones, and changes in jury awards are all variables that usually cannot be accounted for until the last minute. Further hindering insurance companies is the fact most states mandate that any rate change, up or down, must be approved through a lengthy government bureaucracy. This will slow down the process of charging the appropriate rates for the risk when time is crucial. This is why you will find that most insurance companies will offer only six month policies for autos. If you think it�s all about insurance companies wanting to charge more every six month, then why are home owner�s policies usually a twelve month policy?


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And it all goes back to the original answer. The companies want to be able to adjust their rates.


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Yes, I agree. It is about being more nimble on adjusting premiums. However, that can work in your favor also. Consider: An insurance company in most states can only charge for a conviction (a ticket) for 36 months from the conviction date (the date you paid it, or went to court.) However, the insurance company is not required nor is it even expected to stop charging for a ticket in the middle of a policy period. So if you got a ticket on 12/1/02 you would expect the reduced rates to come around 12/1/05. However, if your policy renews on 11/15/05 then if you have an annual policy you won't actually see the reduced rates until 11/15/06.

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