How does combining auto insurance discounts work?
Auto insurance companies love to advertise their discounts (Save with winter tires! Save with anti-theft equipment! Save with a farmer's lifestyle!). It's the type of tried and true marketing technique that sacrifices a small amount of revenue on various sales but greatly increases the overall volume of sales being made; a minor loss for a major gain.
Unless of course the loss isn't so minor.
For instance, what if those discounts start to really stack? Wouldn't an auto insurance company be in big trouble if most of its customers claimed for several discounts all at once?
Theoretically, yes. There's only so much generosity a business can show to clients before it collapses upon itself. And if that happens, no one wins.
In order to avoid such a fate and stay afloat, insurance companies have safeguards in place that prevent the discount-hawking customer from cashing in too much.
The safeguards
Changing the base rate
People's eyes light up when they see offers like "25% off!" or "15% discount!" The thought of those numbers combining together is pretty tantalizing at first glance.
But upon second glance, it might be a little less appealing. Why? Because 25% plus 15% probably isn't 40%; at least, not in terms of the initial base rate.
Let's say a policy chalks up to $1,200 per month before the multiple discounts the driver is claiming have been factored in. Some companies will designate $1,200 as the initial base rate and then apply all discounts in descending order, applying a new base rate every time.
If our hypothetical driver is claiming a 20% telematics discount, a 15% bundling discount, and a 5% loyalty discount, then this method would produce a new premium amount of $775.20. That amount is $55.20 greater than what the insurer would charge if it was applying the discounts cumulatively.
Capping things altogether
Rather than factor in every single discount and let it dictate the premium cost, some insurers will choose instead to set a hard cap that discounts cannot exceed. This could be in the form of a percentage or an actual dollar amount.
Going down this route is certainly the safer choice for insurers. It eliminates the possibility of exceedingly discount-eligible customers walking away with a king's ransom of savings.
However, it also may serve as a deal breaker that sends a potential customer looking elsewhere. Which is a risk some insurers view as less risky than not having a cap at all.