If this didn’t happen to a certain extent, people wouldn’t ask. So the answer is yes; insurance companies will offer discounted rates to win new business. However, it’s not a practice that yields good long-term results in the insurance industry. If you’re signing up with a reputable company that has been through multiple market cycles and is committed to insuring your operation, this shouldn’t be a huge concern.
Discounting happens in many businesses. Retail stores will heavily discount an item to attract attention, with the hope that consumers will buy additional items while in the store. Playstation loses money when they sell a console, but they make money on the games they sell.
However, many people fear they will get an extremely cheap quote from an insurance company to win their business, only for the insurance company to increase their rate in the second year.
This strategy is extremely dangerous for an insurance company. Every time they sell you a product, they accept the possibility that they will have to pay a much more significant sum of money in a claim.
For example, let’s say you pay $5,000 to insure a building estimated to cost $1,000,000 to rebuild. In most years, you won’t need that policy. You will think to yourself that insurance is a scam. You pay all this money in and never get any money back.
However, now let’s say your neighbor down the street, who also pays $5,000 a year for a building estimated to cost $1,000,000 to rebuild, experiences a terrible pipe burst and needs $250,000 to repair his building. The insurance company has now collected $10,000 between you and your neighbor but had to pay $250,000, which means they lost $240,000.
That’s not even considering their overhead.
For insurance to work for an insurance company, they have to collect a sustainable amount of premium from many similar risks. If they discount their prices too much, they risk taking terrible losses. When terrible losses hit insurance companies, they have to raise rates, lose customers, lose credibility with rating agencies, and have difficulty raising money to fund their insurance products.
Good insurance companies take a measured approach to acquiring new business. They want to acquire the right kind of customer at a sustainable price. If you’re signing up with the right insurance company, starter rates shouldn’t be a big concern.
June is National Safety Month, and we wanted to take this opportunity to talk about a very important safety topic for every organization. That topic...