Why do I have to renew my car insurance every six months?
You probably receive a renewal notice on your car insurance every six months, no matter how often you are billed for your premiums. You will know the notification you receive is a renewal notice because there will be a declarations page, or “dec sheet,” included with your statement. The dec sheet outlines the terms of your insurance coverage and lists the types, deductibles, and limits of your policies. Even if you are not aware of it, there is a reason that you get a renewal every six months instead of every three or twelve months, and it has to do with the insurance company’s procedures for figuring your insurance premium rates.
Auto insurance companies have to decide how often to renew coverage with their customers. In order to make this decision they must consider several facts.
First, it takes manpower and money to generate renewal offers to each customer a company serves. The company must decide on a renewal rate, determine the coverage the customer should have, review all of the customer’s records from the Department of Motor Vehicles, print out the offer, mail it, and collect the payment.
This process takes time and effort, and involves several employees for each stage of the process. Generating renewal notices for each and every customer of the company cannot be accomplished on a monthly or even every three-month basis. For this reason, once or twice a year is as often as an insurance company can hope to generate renewals. In order to prepare accurate statements and handle customer issues such as change of addresses, the less often the company has to generate statements the more effective it will be.
However, once a year may not be often enough for most companies. This is because car insurance companies are consistently fine-tuning the rates they charge customers in relation to several factors. One factor is the customer’s individual driving record. If a customer has incurred a speeding ticket or some other form of traffic violation, or if the customer has filed an at-fault claim since the last renewal period, it is crucial that the insurance company know about this and calculate a new premium based on these facts. Customers who file at-fault claims cost the company money, and customers who have speeding or other traffic violations are at higher risk for a claim than other customers. In order to price their products effectively, insurance companies must consider these factors.
Therefore, most insurance companies have determined that six months is the optimum time period for renewals. Six months allows the company plenty of time to get the paperwork involved in a renewal taken care of while still allowing the company to examine driving records from the Department of Motor Vehicles and to compile information on at-fault claims for each customer.
The insurance company may also take some of this time to collect other information on customers
For example, it has become very common for insurance companies to use information obtained from customers’ credit reports to determine insurance rates. The logic behind this is that those customers who have lower credit ratings pose a greater risk for claims than those with higher credit ratings. While this is in no way indicative of individuals, it is statistically true as a group. Therefore, insurance companies may sweep credit reports at least once a year to help determine rates on individual customers. However, some states will not allow insurance companies to use credit report information and some only allow this information to be used in determining prices for new customers. In each case, the insurance companies are bound by the laws of the state in which they do business, and what the company does in one state may not reflect its business practices in another.
Renewals are almost always handled on a six-month basis, but how often a customer pays his or her bill is another matter. Many companies offer monthly payment plans that break six-month premiums into manageable bites for customers on a budget. However, customers who can afford to pay the six-month premiums in advance are more likely to receive discounts than those who must pay by the month. Many companies also allow customers to break large six-month premium payments into two smaller, more manageable payments by adding a small processing fee to each payment. For example, if your six-month renewal price is $700, your company may allow you to pay $355 on the renewal date and $355 thirty days later, and will still consider this an “on time” payment of your full premium amount, thereby qualifying you for any discounts available for paying “on time.”