About this video
Choosing an insurer starts with price shopping, but you also need to check the company's financial strength (using ratings agencies like AM Best and Moody's) and how reliably it pays claims (using consumer reviews). Finally, consider whether to buy online, from an agent tied to one company, or from an independent agent who can compare many insurers.
You'll be able to
- explain why price is not the only factor when choosing an insurer.
- use financial strength ratings and reviews to judge an insurance company.
- compare a company agent with an independent agent.
Key words
- Quote
- A price an insurer offers for a policy based on details you give them.
- Solvency
- Whether a company has enough money to pay what it owes, including claims.
- Ratings agency
- A company like AM Best or Moody's that grades the financial strength of other companies.
- Exposure
- How much an insurer could have to pay out if a big event, like a hurricane, happens.
- Independent agent
- An agent who can get quotes from many different insurers.
Transcript
- Let's say that you're in the market for insurance, and it could be any type of insurance. It could be car insurance, it could be life insurance. And the question is, how do you pick which company to get your insurance with? Well, the first step that most people do is they try to price shop.
They say, okay, I'm looking for this type of car insurance with this kind of deductible. This is what my driving record looks like. This is how many miles I'm gonna drive, whatever inputs I can give in order to get a quote for that insurance. And then they'll compare those prices and they'll say, okay, depending on the scenarios that I'm likely to find myself in, which is probably the best deal, and that is how you should start things off.
But there's one thing to think about that some people don't. We always assume, oh, these are insurance companies. Surely if my car gets into an accident and I need them to pay for it, they'll be there for that. Well, that tends to be the case, but it's not always the case.
So you definitely have to look at the quality of the insurance company as well. Remember everyone's sending them these premiums and sending these checks, but they're doing that if something went bad that these insurance companies are gonna be in the position to be able to provide for you when the insurance kicks in.
And if the insurance company itself is in a very bad financial situation, if they're not profitable, if, let's say they have a lot of exposure. Let's say it's homeowner's insurance, or flood insurance, or something like that, and they have a lot of exposure and there's a big hurricane, and then now they have exposure for tens of billions of dollars, and there are situations where they may not make it.
So it's good to look at the how strong the financial position of the company is. Now there, luckily, you don't have to do the work yourself. There are ratings agencies, things like AM Best, Moody's. AM Best specializes in insurance. And the rule of thumb is if you have really high grade, so the A+++ on the AM Best is the highest.
If we're looking at the other ones, you'll often see things like AAA. That means it's in a really good financial position, very unlikely to fold before you actually need the insurance. And then it goes from there. You have A++, A-, B++, so on and so on and so forth.
And in general, if you're below B, that I would be skeptical of. But you know, the higher, better. Now, it's not just about the solvency or how strong the financial position of the company is. Some might be a little bit harder to get the money out when you have the claim than others, so also read things like consumer reports and other reviews on what people are saying about that insurer, and obviously there are situations where someone thinks they deserve the money, but the insurance company is right, they don't deserve the money.
But generally speaking, if you get a sense of how hard it is to get the reimbursements for the insurance company to cover it when you need it, that will tell a lot. So that's another thing to think about. Now, last but not least, you have to ask yourself, who am I gonna buy this insurance with?
And there's several people you could buy it with. You can, well, one, sometimes you could buy it directly online, but in a lot of cases, you buy it from an agent. And even within an agent, there's two different scenarios. One is an agent that works for a company.
So you might have an agent that works for Allstate or State Farm or Farmers, some of these, and there are other insurance companies. Those are some of the big ones that, you know, are at the top of my head. But then there are also independent agents. Now, the advantage of an independent agent is that they can get quotes across many different insurers in a lot of different situations.
But even then, you wanna make sure that that independent agent, maybe they have some professional designations, they're licensed so that you know you're getting good information. You probably wanna know how they are compensated, how are they making their money, and by whom.
And then if they're showing you insurance companies where you're less confident of their financial situation, do the research like I just described. If you're talking to an agent that's dedicated to one of the insurance companies, they tend to be very knowledgeable about that.
But just remember, they are going to, and they'll be good at being able to explain the ins and outs of that insurance and the pros and cons of it, but they will only be representing their company. So these are just the things to think about. As you price shop, make sure the insurance company's good for it.
Try to make sure as well as you can that the insurance company stands by their promises and gives the money when they're supposed to give the money, and that you're getting good information from a high-quality agent.
Video © Khan Academy, used under CC BY-NC-SA. Watch on Khan Academy. Puzzicle is not affiliated with Khan Academy.