The business of insurance is actually rather strange. The customers hope they will never have to use the services they pay for. If there’s a claim, it means a loss and possible injuries have been sustained. No one wants to be injured. The money that may come in from the insurer often does not make the insured feel any better. From the insurers’ point of view, the business is a little like gambling. Thousands of people want protection against possible losses so they are prepared to share the risk. All the insurer has to do is estimate the total amount that will be claimed each year and collect more than that amount as premium payments. If the insurer gets the estimates right, it covers all the payments out, has enough to cover the administrative costs, and makes a profit. Not surprisingly, insurers tend to estimate on the high side. That way, if they have a large surplus at the end of the first year, it gives them a capital buffer for the years in which they estimate too low. Indeed, every state has an Insurance Commissioner who regulates the local insurers. One of the standard regulations is to set the minimum capital reserve the insurers must carry.
Once the insurer has made the annual estimate, this amount has to be divided among all the policyholders. This is done by dividing the insured into different groups based on the risk of a claim. The annual amount is then divided by the total number of policyholders and adjusted between the groups. If you are allocated to a high risk group, your premium rate will be high. For those with a low risk of a claim, there’s relatively cheap auto insurance. It’s a reasonably fair way of dividing the loss between thousands of people.
Once the basic calculations have been done, the insurer waits for people to ask for their auto insurance quotes. When they supply their personal details, the premium rate is adjusted and the quotes are sent out. Some people accept immediately which makes a contract. Other negotiate by asking about discounts. If the insurer decides to change the rate, it sends out new auto insurance quotes which the applicant may then accept. In other words the quote is the means whereby the insurer offers to contract at a particular premium rate. However, under the terms of the contract, the insurer usually reserves the right to increase the premium if you make a claim or commit a serious moving offense, e.g. driving while under the influence. This allows the insurer to adjust the rate as the risk is re-evaluated. Similarly, under the new-pay-as-you-drive plans, the premium rate may change from week to week depending on the mileage and quality of your driving. It’s therefore up to you to read the terms of the policy before you buy to see under what circumstances the insurer can change the rate during the term of the contract.