Question 1

What is a "Loss-Free" Discount?

Accepted Answer

A “Loss-Free” Discount is an incentive insurance companies can offer to accounts they deem as a more favorable risk, i.e. insured with no or low history of claims.

Insurance companies like to offer an incentive for responsible property ownership and prefer to write policies for what they consider to be good risks. In other words, insurance companies prefer to write policies that cover property that is in good repair and has a history of either no claims or none in the recent past. Oftentimes, “recent past” refers to around the 3 most recent years.

Still, insurance companies will often write insurance policies for insureds and their properties even if claims have occurred in the past 3 years. After all, these individuals still need insurance, and, many times, they may have simply been on the receiving end of some very bad luck.

However, on a statistical basis, insurance companies look at accounts that have not had prior losses as being a more favorable risk. In order to offer the most competitive pricing to accounts that have no prior losses, some insurance companies offer a “Loss-Free Discount”.

Question 2

Are "Loss-Free" Discounts Worth It?

Accepted Answer

The short answer is sometimes. Loss-Free Discounts can be a great way for insureds to save money, and sometimes a lot of it. But, they are also dependent on you maintaining a “Loss-Free” status with the insurance company. So, it is important to be aware of the discounts that are applied to your policy. Sometimes, a policy that is a bit higher in premium cost without a Loss-Free Discount is a better way to go because the credits the insurance company applied to make their final premium numbers competitive are not contingent upon your past or future loss activity.

For example, let’s say that you are offered two policy options by an independent agent. One policy is $100 less in premium, but has a Loss-Free Discount applied which reduces the policy premium by 10%. For illustrative purposes, let’s assume 10% equates to a $1,000 savings. The other policy is $100 more expensive, but this company’s base rates are actually lower and they do not have a Loss-Free Discount available.

You could save $100 by going with the policy containing the Loss-Free Discount. But, if you have a claim, you will lose the Loss-Free Discount at the next renewal and end up paying $900 more than the second policy would have cost you.

In this occurrence, the first company did not “raise” your rates because you had a loss; you simply were no longer eligible for the discount you had been previously receiving. For this reason, it is important to consider if a Loss-Free Discount is the best deal when you are selecting which company’s application to sign.

Question 3

What Determines Your "Tier" in Insurance?

Accepted Answer

The stipulations for that pricing tier may be determined upon your payment history, your past claims occurrences, your driving record, or other actuarial statistics that the insurance company uses to help predict the favorability and profitability of writing insurance policies for clients like you. The tier is based on parameters that are automatically applied given the specifics of your account and the rates in each tier are predetermined. Contrary to what may seem to be occurring, this tiering isn’t arbitrarily based upon any one individual’s decision to increase your rates, but instead set by algorithmic measures. When writing what is considered to be “homogenous” types of risk or risks that are similar in type and exposures, like most homeowners insurance, insurance companies use statistics and the law of large numbers to determine how to appropriately price an account. Based on the prior loss experiences of all of their customers, the insurance company can more accurately predict the percentage of accounts that will experience claims and certain specific situations may indicate a greater likelihood of a future claim. One of these indicators is “prior losses” and, as such, having a claim on your account may place you in a less favorable tier upon renewal.

Question 4

How Do Insurance Companies Evaluate Profitability?

Accepted Answer

Insurance companies evaluate profitability by looking closely at loss ratios in order to determine if, over time, the losses incurred are trending above the premium paid. If the account is experiencing a high volume of high-dollar claims, the company may decide that their pricing is unsustainable and decide that a premium increase is necessary if they are to continue to offer insurance.

It is not customary for this to occur after just one loss, whether big or small. However, a frequency of claims may raise red flags and initiate a discussion. It is important to remember that insurance companies are for-profit businesses - in order to pay claims and their operating expenses, the hard reality is they must make more money than they spend.

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