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Knowledge is power. In the insurance industry, that's especially true. Auto insurance rates are going down for many people due in no small part to a capacity for processing information unsurpassed in the whole of civilization. It's a trend that's likely to continue.

Insurance companies must appease two very powerful yet often opposing forces. While competition constantly motivates insurance companies to keep their rates down, government and industry oversight motivates them to keep them up. States require insurance companies to keep a certain amount of cash on hand at all times in order to cover claims. This amount is based on current outstanding business and can be quite substantial even for small regional carriers. Insurance companies who fail to meet these standards are subject to state disciplinary action; in extreme cases the state may shut them down and liquidate outstanding policies to other companies. Fortunately such actions are rare, as no serious, reputable company would dare skirt these regulations if they could possibly avoid it.

Further, independent auditing agencies such as A.M. Best look at cash reserves in comparison to losses paid to determine a company's strength. This comparison is absolutely critical to their final assessment of the company, which in turn is directly linked to the company's reputation overall.

As a result, insurance companies are constantly looking for ways to keep their rates as low as possible, but not so low that they negatively affect their loss ratio. This is why collecting as much information as possible is so important. Based on known tendencies for certain groups, insurance companies can assign lower rates to those less likely to make claims and therefore less likely to adversely affect the all-important loss ratio: drivers with no tickets or claims, drivers with high credit scores, drivers in their 40s and 50s, drivers who travel less than three miles to work, etc. etc. etc.

The more information collected, the better the insurance companies can address the balancing act of staying competitive while staying financially strong at the same time. so, companies that may have had only a handful of ratings to assign to drivers only a few years ago may have hundreds or even thousands today. These precise ratings in turn allow truly safe drivers to enjoy lower premiums.

Insurance is very much a business based on statistics. A home office's actuary is in many ways more influential in determining rates than any other employee, including senior management.

However, premium determinations aren't always so scientific. Sometimes companies will drastically cut their rates across the board in order to attract new business. This is particularly true when a company enters a local market for the first time. However these inexpensive premiums generally don't last, especially if the company undercuts themselves too much. Loss ratios inevitably catch up to them, and the company will soon find itself under immense pressure to raise rates to compensate. Prospective customers who come across something like this would be well-advised to take advantage of these low rates while they can, but should be warned they're not likely to hold up under the industry's scrutiny for very long.

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