How does a car insurance company work?

Car insurance companies charge monthly rates for coverage. Policyholders can submit claims after accidents and car insurance companies will pay a decided amount to the client for repairs.

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A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Joel Ohman is the CEO of a private equity backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Jo...

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Reviewed by Joel Ohman
Founder & CFP®

UPDATED: Jan 25, 2021

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Here's what you need to know...

  • Knowing how a car insurance company works helps you understand the insurance application and claims processes
  • It is important to know the policies of a company before you commit
  • Shopping and comparing policies is the best way to ensure that you make the best choice in your car insurance

When shopping for car insurance, many people wonder how a car insurance company works. It’s a viable question and one that deserves an answer.

After all, understanding the process of car insurance helps you to gain an understanding of how insurance protects you in the event of an accident from both physical and financial disaster.

Once you understand how insurance companies operate, make sure you compare rates from several companies to get the best coverage at the right price! Enter your zip code above to get started for FREE!

History of Car Insurance

One question to answer first when exploring this topic is to consider the original reason that insurance was invented.

The original car insurance was developed in the year 1885 when Karl Benz of Germany decided that more accidents were inherent since there were more cars being produced.

Shortly after, the U.S. Legal Department decided that the only fair thing would be to put the burden of the cost primarily on the person who was “at fault.”

In 1897, the first insurance policy was issued to Gilbert J. Loomis of Dayton, Ohio. He paid $1000 to the Travelers Insurance Company for this policy.

In 1907, the first actual insurance company was established. It was known as Amica and still exists as a car insurance company today.

In 1922, State Farm Insurance was created. Other car insurance companies began to sprout up following this, as the need grew to cover more people and to give people more of an option in their premiums and coverage plans.

Progressive Insurance was the first to create a website that serviced customers online. Now there are hundreds of companies that do this.

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The Steps of Obtaining a Policy

When you apply for a policy, the insurance company will go through some steps to decide on your premium and put your policy in place. As pointed out in the Investopedia article (see the link above), insurance works by pooling the risk.

In other words, they charge everyone who takes out a policy a monthly premium amount that helps to distribute the money throughout the company’s reserve and resources.

When you apply for a policy, here’s what will happen:

  • A driver applies for an auto insurance policy by providing their age, date of birth, car identification information, and other data.
  • The company does a search for information regarding the applicant’s driving history, type of car, make, and model to decide on rates.
  • The insurance company obtains the applicant’s driving history from the state’s finance department of the applicant.
  • A notice will be sent to the applicant that their driving record was requested.
  • The applicant is offered a policy. If they qualify, which they must sign and return.
  • The applicant’s policy normally goes into effect the day the policy is issued, and the first premium is paid.

Keep in mind that you are not covered until the first premium is paid.

Some people expect to be issued a policy before their first payment is made. Most insurance companies require the first premium before issuing a policy to cover it.

Understanding the Claims Process

It is helpful also to understand the claims process. You hope you never have to make a claim, but when you do, you should have an understanding of how it works so that you will know what to expect.

Here are the steps of the claims process:

  • First notice of loss – The first step in the car insurance claims process is the first notice of loss. This step occurs at the scene of the accident and occurs when you call your insurance company to report the accident. At this stage, you simply report the accident to your insurance company, and they take down your statement
  • Gathering the facts – At this stage, you should document anything you think will help you in getting your claim processed quickly and correctly. Your insurance company will send an insurance adjuster to your location shortly after this step
  • Settlement and resolution – Once the adjuster has seen your vehicle, the company will make a decision on what it will pay to get your vehicle replaced or repaired

Getting Your Car Repaired

Once you have settled for any physical injuries, (if any), you will want to get your car repaired or replaced so that you can obtain reliable transportation after the accident.

Here are the steps that you will go through to get your car repaired after you have received your claims money:

  • The insurance adjuster meets with you to assess the extent of the damage
  • They may ask you to get two or three estimates to see which mechanic or body repair shop can fix it for the lowest price
  • The insurance company sends your check to the car repair place
  • You get your repairs completed and get your car back
  • If your car is not repairable, you will be able to purchase another car of equal value to the one you lost

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Shopping for Insurance

The time to plan for a potential collision is now. Shopping for and obtaining adequate car insurance coverage from a reliable insurance provider is job one, to ensure that you’ll be able to get your car back in as good of condition as possible.

You should make sure that you are getting your insurance from a company that pays their claims on time and without delay.

Ask your online advisor to look into the claims policies of the companies you are considering to be sure they pay claims promptly.

When you have an accident, the most important thing is getting back on the road with your car as soon as possible.

You also need to choose an insurance company that will listen to your individual needs and make adjustments to your policy as needed.

Here are some of the questions you may want to ask your online representative when shopping for auto insurance:

  • What is the monthly premium for my age and demographics?
  • Which coverages are optional?
  • How fast do you pay claims?
  • Do you have good customer service?
  • Can you make adjustments to my policy?

These are all important questions when shopping for car insurance. You need to make sure that you are getting the best rate for your demographic group, and understand which coverages are optional.

There’s no need to opt into every extra coverage that an agent suggests. But ask questions about the ones they offer and check your medical coverage to see if you are already covered before opting in.

If you have an understanding of how a car insurance company works, you can feel more secure about the choice of provider you make, and you will be less likely to have to change.

Enter your zip code below and starting comparirng affordable car insurance quotes for FREE!



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Enter your ZIP code below to view companies that have cheap car insurance rates.

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