How does auto insurance company profitability work?

Auto insurance providers profit when their customers don't make claims. Riskier drivers pay higher rates to offset the higher chance of losses.

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Mathew B. Sims is Editor-in-Chief and has authored, edited, and contributed to several books. He has been working in the insurance industry ensuring content is accurate for consumers who are searching for the best policies and rates. He has also been featured on sites like UpJourney.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years (BBB A+). He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like and Safeco. He reviews content, ensuring that ex...

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Jul 14, 2021

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Things to Remember...

The business of car insurance is a profit-oriented one. If it wasn’t most companies in the industry would soon be bankrupt as they would have no funds set aside to pay off claims and deal with large damage costs.

That said, some insurance companies are very successful at avoiding claims and maximizing the payment of dollars that never seem to realize anything for customers.

To find reliable auto insurance companies, enter your ZIP code into our FREE car insurance quote finder.

Ideally, an insurance company wants to have no claims at all, which means every payment becomes a 100 percent profit situation.

Make sure your auto insurance company can recognize claims and give you quality rates by entering your ZIP code into our FREE auto insurance comparison tool.

The Pool Matters


How does the best ranked auto insurance company make it to the top? The best-ranked auto insurance company will stay solvent by having a large pool of customers paying into a fund. The company then uses this fund to pay claims as they occur over the life of the various insurance policies issues.

The insurance company has a vested interest to see as few claims as possible. Each claim eats away at the funds available in the pot to work with.

To offset the potential problem of a large claim causing a significant hit, private auto insurance companies work actively to have a large number of customers who just make payments and never need to use their policies.

These premiums then aggregate and become a large base of money to work with.

Over time, as policies expire, the unused funds become pure profit for the car insurance company which it can then use to operate, pay its people, and grow as a business.

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Free Auto Insurance Comparison

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

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Keep the Claims Down

As noted earlier, the number of claims received and paid have a direct effect on the insurance company’s ability to stay in the black.

Very often a few large claims can trigger significant costs as they may include another party’s car damage, medical injuries, the covered driver’s injuries and damage to his own car.

To ensure that the claims received are valid, a car insurance company will screen and filter them. This involve multi-level approach of checking out the accident scene itself, the vehicles, witness statements, and any other evidence.

The insurance company can then arguably deny a customer’s claim if it feels justified to do so. However, this is risky since many state laws offer triple damages for a bad faith denial just to avoid a large cost.

Insurance companies instead try to low ball the payouts or work with lower cost mechanics to reduce claim payments. Make sure you do not get fooled by a car insurance scam.

Alternatively, car insurance companies also try to lower claims when monies are sought by injured parties. Their own insurance companies may call or the individuals may sue directly.

In those cases, the target car insurance company will try to work towards a settlement and stay away from court which can be potentially far more expensive just in legal fees and possible damage awards.

Filter Out Bad Risks


Car insurance companies also have to incorporate good judgment of risk in new customers and existing ones.

Where a policyholder or new customer shows serious signs of high claim risk, many car insurance companies move to either deny a coverage application or end an existing one.

Where its a new customer, an insurance company may just politely deny the coverage application outright.

Where an existing customer is involved, the car insurance company may pay off the latest claim and then cancel the policy outright for any more service.

The policyholder doesn’t owe any funds to the insurance company but he’s then out in the cold and has to find a new insurer for coverage.

Car insurance companies are not automatically evil businesses because they aim to make a profit. It’s the fact that they do make profits that allows them to expand and provide more people more coverage policies for their cars.

However, some companies do practice aggressive risk avoidance which can end up low-balling a claim payment or denying a valid charge that should have been covered.

When that occurs, the company has to decide whether to make amends quickly or take on its own risk of higher legal costs if disputed.

Enter your ZIP code into our FREE car insurance tool to make the most of your money when buying your car insurance policy.

For customers, the quick way to adjust to a car insurance company that is not cooperative or supportive is to find a different insurer.

With the availability of car insurance comparison websites available on the Internet today, this task is very easy to perform.

With basic data on car type, zip code or location, driver’s age, and similar information, a user can find a variety of options available from multiple insurers.

Enter your ZIP code into our FREE auto insurance comparison tool now! And most sites connect users to those insurance companies to apply and pursue better coverage plans.

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

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