Will Any Insurance Company Be Okay?

One common hesitation that people have about switching car insurance is evaluating an insurance company.  There are two main characteristics that insurers need in order to be trustworthy: sufficient capital to pay claims and good customer service.  All of the other things are nice to have, like a good functioning mobile app or web site, a local office, or 24-7 phone availability, but when push comes to shove, they need to handle your claims well.


Let’s get a little technical here and explain where insurers get the money to pay your claims.  There are two primary sources of money for paying claims: premiums and investment income.  The proportion of these can vary depending on the strength of the economy or the adequacy of insurer’s premiums, but it doesn’t matter to the customer.  Finally, the size of a company and its diversification can also be beneficial.  The primary goal here is avoiding buying policies from a company that might go bankrupt.


These are the amounts you pay for a policy.  Although percentages vary, it’s conceivable that 75% of your bill will go toward paying someone’s claim.  In other words, roughly $750 of your $1,000 annual bill will be paid out in claims.  The trick here is that insurers with large dollars of written premiums will have more premium cash to handle payments.  Imagine a start-up company in Houston, where most of their policies are local, and their prices are low to attract market share–Hurricane Harvey might bankrupt them.  On the other hand, State Farm writes $55 billion in premiums every year–it’s easy to imagine how they can handle an event or two.  Here is a table of the top insurers by written premium in 2013, from AM Best:

Rank Company 2013 Premiums Written
1 State Farm $55 billion
2 Berkshire Hathaway (GEICO) $28 billion
3 Allstate $27 billion
4 Liberty Mutual $25 billion
5 Travelers $21 billion
6 American International $20 billion
7 Nationwide $17 billion
8 Progressive $17 billion
9 Farmers $14 billion
10 USAA $14 billion

Investment Income

This is the amount of income the insurer makes by conservatively investing premiums until they are needed.  Due to accounting regulations, insurers are only supposed to use premiums they collect for claims that happen in the future.  (That small Houston insurer above can’t just go raising rates and force future customers to pay for that backlog of claims.)  Because of this, when someone pays in advance, they end up with premiums that they have collected, but not paid out yet in claims (or refunds for cancelled policies).  These premiums are invested in safe assets and earn interest for as long as they’re invested.  Those investment dollars can really add up.  For example, say State Farm can get 4% annual returns in their investment and holds their premiums for 3 months on average.  They would earn over $541 million in interest.

Larger Company Size

Although not typically used to pay for the claims, having the resources of a large company can be helpful.  Take GEICO for example.  Berkshire Hathaway (Warren Buffet’s company) owns GEICO, along with many different companies from a railroad to Fruit of the Loom to Dairy Queen.  If they suffered a catastrophe in their insurance markets, they could use some of the revenue or assets in other divisions to avoid bankruptcy.  Note that this isn’t a sure-fire indicator, because smaller companies can buy reinsurance to cover these catastrophic losses.  However, it is still useful.

Customer Service

Let’s take a look now at the other key element in picking a company: customer service.  Let’s face it: it doesn’t matter how much money a company has sitting around if they won’t pay you when you need it.  Specifically, we want to look at customer service when it comes to claims. JD Power ranks insurer’s claim service.  Here are the top few:

Rank Name Rating
(out of 5 stars)
1 The Hartford 5
1 USAA 5
1 NJM Insurance Co. 5
1 Erie Insurance 5
1 Auto-Owners Insurance 5
2 American Family 4
2 Amica Mutual 4
2 Nationwide 4

Just remember, this list isn’t the be-all, end-all.  The auto insurance industry is growing slowly as the overall number of licensed drivers increases slowly.  The vast majority of drivers already have insurance, so these companies have to focus on the overall picture.  The fact that State Farm writes so many premiums doesn’t mean much if their insureds don’t care for the service.  How many times have you heard of a negative experience from a company and decided to move your business elsewhere?  Most of the service here is exceptional, and the industry in general is one of the most highly rated.

The Sweet Spot

The sweet spot is where these two lists overlap.  That’s where you can find a strong company with good service that will be there for you when you need them. Head over to the Save Money with Car Insurance Quotes page for an easy process to picking a company.

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