Car Insurance Rates for Automobiles
Car insurance can be expensive but the car owner knows that he must carry insurance for his own protection. To any one familiar with the results automobile business written by the insurance companies during the past year the present rates for various forms of coverage do not seem unreasonable nor excessive when compared with other lines of insurance coverage in which the loss ratio reaches such high water marks. But to the average car owner who knows that he must carry insurance for his own protection the rates quoted by his broker seem unwarranted. It is well, therefore, to get together on this question and see where we stand.
It is commonly believed by those who do not clearly understand the nature of insurance and the operations of the business that the insurers fix rates so that the profits shall be lucrative. It is the same sort of thing we hear about the oil companies, the repair shops and even the States' motor vehicle departments. It is one reason why many motorists are unfortunately led into experimenting with reciprocals and inter-insurance exchanges. It explains why thousands of car owners who suffer collisions, theft losses or damage suits are caught uninsured.
Obviously some light is needed on the fundamental purpose of the insurance companies. Of course no company is going to engage in the business of insuring property owners against monetary loss occasioned by various hazards unless it is compensated for its trouble. As in any other line of business, therefore, a profit is necessary. In addition to this rates must be high enough to include necessary reserve required by law for unearned premiums as well as losses and expenses incident to conduct of the business. It is in charging sufficient premium to cover these requirements and to meet the abnormal number of current losses that present high rates result.
Lest I be suspected of attempting to make out a case in behalf of the insurance companies I hasten to state that their reserve requirements are regulated by the insurance departments of the states in which the companies do business and are literally forced upon them 'just as motorists are required by law to equip their cars with legal headlight lenses. My point is best explained by the little story of a lady who informed her insurance broker that the mass of printed matter on the back of the policy was simply camouflage to discourage her out of thinking she had a right to present a claim. The broker calmly reminded her that the policy-contract referred to was modeled in accordance with the requirements of the particular state's insurance laws.
It should be obvious why a sufficient reserve ought to be in the vaults of any insurer, but judging from the way car owners run risks with reciprocals which exist by paying their losses out of the day to day premium income, the idea of reserve is not clearly understood. Doubtless it is because they overlook the fact that an insurance company functions not only as an indemnifier of individuals but as indemnifiers of groups of individuals.- It is an easy matter far a weak insurance company to honor John Doe's claim for the monetary equivalent of a new fender or to see that Brown's car is pampered in an effort to make amends for the cruelty of a car thief, but it is not so simple a matter to write drafts promptly to cover losses incurred in a big garage fire.
A conflagration is always a possibility which insurance companies must be prepared for. If motor cars had been in common use during the San Francisco fire many an owner of an insured machine would have been forced to go without indemnity. The argument has been advanced that in case of a conflagration the loss of automobiles would be comparatively small, since motor cars would be saved in the very act of transporting refugees from the scene of danger. But it is doubtful whether this would save more than half the cars of a city, for in any large city there are always thousands of cars in dead storage, undergoing repairs and being repainted. They cannot be moved in an emergency and must therefore perish. Furthermore, there are always a number of car owners away from the city, which means that in case of conflagration their cars would not be likely to be removed from the scene of danger, particularly if they were locked in private garages. Moreover the insurance companies' liability would not end with the mere removal of the cars from the fire area. In the attempt to get to safety many a motorist would collide with other vehicles, thus adding to the steady string of collision losses. Following the disruption of the city many a car would be stolen, which even in the case of joy riding would result in causing the insurance companies no end of claims. Under such conditions weak insurers could not pay all the claims and would meekly fold up their tents and depart.
One good reason for the present high insurance rates, therefore, is the security which the law requires to be included in the sale of each policy. But this is not the main reason. If the normal average of losses were somewhere within reason reserves could be accumulated out of premiums based on much lower rates. Were it not for the fact that the stock insurance companies are able to show more favorable loss ratios on their other lines of business and draw on those profits to meet the claim requirements of the automobile departments surplus during the last few years--particularly in 1921 when the moral hazard was such a factor—would have been seriously drawn upon even at the existing high rates.
The long and short of it is that only by producing results through a campaign to educate motorists to an understanding of loss prevention can rates be reduced with safety. It might be possible to cut rates and get along tolerably well provided no catastrophe occurred which would present a large aggregate loss claim, but that would not be offering real protection.
Source: MoToR Magazine, Nov. 1922
1920's AUTOMOBILE RESOURCES
Automotive Industry Events of 1922
Press releases detailing management changes and technological advances of 1922.
List of 1922 Automobiles
Full List of Car Makes and Prices in 1922.