If you have insurance of some kind, and you are in an accident, does that mean that they increase your monthly fee?

Question

I've always been confused by things like this:

1. Joe has his car stolen or drives it into a wall by accident, or some other kind of accident happens which "goes on the insurance".
2. Joe gets money from his insurance company.
3. Joe says: "Nah! No big deal! It was all covered on my insurance!"

But isn't it a big deal after all? I cannot imagine that the insurance company just happily pays out money like that, with no downside to Joe. Their whole business is based on collecting monthly fees and not on paying out expensive new cars to clumsy/careless people.

Surely the company must punish Joe in some way, such as increasing the monthly fee that he has to pay? If not, a customer can cost them a fortune by continuously crashing cars by accident and getting new cars on the insurance.

So when Joe claims that it's "no big deal", how short-sighted can you get? Does he not even think of the next monthly insurance bill, which will now have an extra $50 added to it or something?

I'm asking this as a person who has never once in my life had any kind of insurance on anything. The whole concept of "insurance" always seemed strange to me. It seems like it would always be better to simply save money yourself, so that you can buy a new car in case there is an accident. That way, you don't perpetually pay a company even if there is never an accident, and you could use it for something else, etc. Since they are a business, they are obviously going to make more from the customer than they ever will pay out, so it seems almost like a polished scam to me.

I must be missing something.

Answer 1

Insurance is all a big numbers game, based on the concept of pooling losses. Certainly, insurance companies would love to collect money and never pay out, but in reality, they will have to pay out claims, because that financial security is the product they are selling.

In the case of Joe, he signed a policy after the insurance company assessed his level of risk and determined the "fair" premium he should pay in order to be covered in the event of an accident. He then is owed to be indemnified (compensated to restore loss) at least up to the level dictated in his policy.

Going forward from the accident however, Joe may see his rates increase. This is not a "punishment" per se, but is a re-assessment of his risk level given he had a recent accident. Over time, with no more incidents, his rates should return to a more normal level.

It seems like it would always be better to simply save money yourself, so that you can buy a new car in case there is an accident.

This is a concept known as Self Insurance and is a viable option for the wealthy, barring no legal requirement for insurance, which most states have for cars. However, the vast majority of people don't have the ability to save in that capacity. Property damage to one's own car is only a portion of the possible exposure, as you have to consider the other person's car, and possible medical bills of both parties (including any passengers). To put it in perspective, the minimum amount of insurance required for many states is around $25,000 (for just the other party's damages when you're at fault), while common policies can go upwards of $100,000 or more.

Answer 2

You're missing a number of things. Last I knew, New Hampshire is the only state that does not require car insurance, that is if you can prove that you can pay for the damages you cause. Furthermore, driving without car insurance is illegal and has penalties ranging from fines to even jail time.

In addition, car insurance covers medical payments for you and your passengers as well as liability coverage for damage to the other driver’s property and medical injuries if you are at fault (up to the limits of your policy).

Your concern for being charged $50 more per month is misplaced.

Answer 3

Self-insure when you can afford to do so (i.e., don't buy consumer warranties) because the money saved by not buying the extended warranty will be more than the expense of the few times where it could have helped.

But DON'T self-insure when a single hit can significantly impact your finances and/or make it impossible to replace the item, such as home insurance, auto liability, or comprehensive/collision insurance on a new(ish) car.

Answer 4

Possibly. It just depends on how the insurance company rates the insured and the nature of the claim.

But often a claim will result in a higher premium but there is no certainty either way.

Having insurance is not a license to be stupid because the insurance company is in the business to make a profit. One drawback to filing claims that the company finds to be questionable is that they may drop you at the next renewal rather than raise your rates.

Answer 5

Actually, you can in effect be “punished” for making too many claims by seeing your premiums increase. In many countries, there is even a national risk scale based on driving history shared by all insurers. Depending on local regulations, insurers can also go as far as kick out some clients.

The more interesting thing is that even before getting into your first accident, the mere fact that you are insured might change your behavior and incite you to take more risk than you otherwise would have (that's related to the broader concept of moral hazard). Excess or deductible is one way to deal with that, as are risk scales that give you a “bonus” or reward after several years of driving without a claim.

This is actually a very general problem: Insurance always has an effect on the behavior of the policyholders and therefore their risk profile. Insurance contracts are designed to mitigate this. Insurance mandates and reinsurance or risk compensation schemes also help with this. This can work relatively well, especially if insurance is effectively mandatory, but it does sometimes result in a completely dysfunctional insurance market.

So you are right that many insurances that are advertised do not always make a lot of sense for individual consumers. Health or car insurance mostly do, because the risks can be very high and regulation ensures the premiums remain manageable without rewarding risky behavior (or at least not too much).

Answer 6

That heavily depends on the type of insurance and probably on the jurisdiction.

As you don't specify a location, I'll take Germany as an example.

Car liability insurances as well as "full car insurances" have a premium discount for lack of damages. The longer you are free of damages, the cheaper they get. If something happens, you lose part of or all the discount.

Other insurances don't have that, but can kick you out if you are too big a cost factor for them.

E. g., break your neighbour's lamp, then two other small things and have it all be covered with your private liability insurance. Then you might be out of luck if you injure someone with your bike which can be very expensive.

Answer 7

"or some other kind of accident happens which "goes on the insurance"

Some types of accidents aren't a big deal because they were caused by other people and you have some kind of proof of that like a police report or the area of the car damaged indicates somebody else did it (like major rear end damage). Your rate won't go up in those cases. Even if the other party isn't insured your state or insurance company will go after them for the money. For example I was in a long line of cars that had a chain reaction accident caused by a drunk driver. That drunk didn't have insurance but the state sued them for the money to pay the insurance companies for the damages. So eventually the insurance company can get back some of the loss that way in many cases. And keep in mind also that the insurance company has also priced their services based on the area where the insured lives and drives so they know the risks of things like car theft in that area and they make sure to collect enough money from everybody in that area to cover it. The point is that the insurance company doesn't always need to raise rates.

Now if you cause an accident you would be wise to pay for it out of your own pocket instead of reporting it, whenever possible.

Answer 8

Most car insurance companies will punish clients which file many claims. They may phrase it as "reward programs" for safe driving but it's the same in the end: people who have more accidents end up paying more. In some countries, such reward/penalty schemes are even mandated by the law.

For this reason it may sometimes be wise to fix minor accidents without using your insurance: if you crack a headlight, you might be better off paying $300 to get it replaced out of your own pocket rather than making your insurance pay for it. If the insurance increases your premium by $50 for a year (because you lose your "safe driving bonus"), you will pay $600 in the end.

You still need insurance in case you hit a pedestrian and are on the hook for paying up their medical bills. No amount of missed insurance bonuses will compensate for the amount of money your insurance might have to pay for you.

Answer 9

Many good answers already, but I'll touch on some points which I don't see mentioned.

• Insurance is only about unpredictable accidents. If they can prove you set the whole thing up and did deliberate damage, then that's called an "insurance fraud" and there's jail time to go with that.
• Even without deliberately causing damage you could still be reckless and insurance policies usually have some clauses that allow them not to pay out in such cases. This is, of course, a slippery slope since "reckless" can be a subjective thing and there have been cases where an insurance company abuses this clause. In general though it's fairly rare.
• If you do play honestly however, your insurance rate usually doesn't go up after a single accident, although the insurance companies do reserve the right to change it at any time for any reason. And they are quite likely to if you have multiple accidents in a short amount of time (meaning that they got something wrong when they estimated your risks).
• All in all it's a number game for the company. As long as it estimates the risks correctly and charges just a bit more, it will always come out on top regardless in the long run.
• As for whether or not to get insurance - that's a difficult question. Someone will have to pay if an accident happens. Can you afford it? Do you want to risk it? In the end, you can't insure everything in your life, so you'll have to take some risks. Which ones? It's clear that on average people would be better off without insurance... but that's only on average. If you happen to get unlucky, an insurance policy might actually turn out to be a lifesaver. Nobody can predict the future, not even insurance companies, so it's up to you to decide what to insure and what to risk in your own personal life.
• Different insurance companies can charge significantly different rates for the same insurance, so it can pay off to go around shopping. But be careful, because the devil's in the details. All of the following and more will affect the price: What risks are covered; how big the pay-out will be; what are the exceptions; how they estimate your risks; what the competition looks like; how likely they are to pay out (some companies offer dirt cheap insurance but then fight tooth and nail when it comes to paying up, others do the opposite); etc.