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How Auto Insurance Works*

As we all've heard, now-a-days, without insurance you're as good as broke. Just as without Auto Insurance you'll end up without a car, the vacation you've been waiting for so long or worse yet, without retirement "funds".

This Auto Insurance game is very efficient. It amazes me how it's all worked out, all the details are planned out. No waste anywhere. Why am I talking about this? Well, this actually pertains a lot to my field, salvage auto repair and restoration.

When one gets Auto Insurance, he expects his investment or satisfaction to be protected from damage. A payment is made every month for a year, two years, five, ten years. What if a claim is never made on the policy? Or what if it is made on the second day? How does the Auto Insurance company deal with that?

Like I said before, it is all in the master plan. When a payment is made on a policy, it goes into a funds pool. Every claim then gets pulled out of that pool. Every month millions of people make payments into this pool but only a fraction of them make a claim. Overall the Auto Insurance company makes a hefty profit.

When a car is damaged, the Auto Insurance company usually gives the owner a choice, either to repair the car or trade the car in for a new one. When the car is traded in for a new one no one cares what happens to the damaged car, for all most know, it gets pressed and shipped to Japan to recycle and make a new vehicle. What most do not know is that when the damaged car leaves it's owner and gets transferred onto the Auto Insurance company's hands, 50% of these cars get a new life in the used cars business.

The Auto Insurance companies auction these cars off to used cars dealers, used car parts yards and rebuilders. Every week hundreds of thousands of these cars get auctioned off all across the world. Just here in my state (Washington) we have 6 Auto Insurance auctions and 2 more in Portland, Oregon. These auctions sell 200 to 400 cars each every week.

The Auto Insurance company will buyout a damaged $15,000 car from the owner for $2,000 to $3,000 and sell it at the auction for $4,000 to $5,000, making a nice profit there too. The dealer or a rebuilder will buy this car at the auction for $4,000 to $5,000, invest another $2,000 to $3,000 in parts and labor to repair it and then sell it as a used car for $11,000 to $12,000. The new owner will get Auto Insurance for this "new" used car and the cycle starts all over again. Good thing we have CarFax to see how many times a car has been through this cycle.

*This is article may not be as accurate on how auto insurance works overall but this is how it looks from my point of view, an interresting read. From my side of the industry, the insurance rebuilding field this is what I see. It makes sense. And so this article was meant as a point of view and an exaggeration, not as an accurate reference.

 

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Updated September 25, 2007
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