Have you ever wondered how the cost of car insurance is determined? Do you feel like the bulls-eye on the dartboard where you are the target of the highest rate imaginable? These feelings can be relieved somewhat by understanding what factors have an impact on automobile insurance premiums.
Risk Affects All Quotes on Car Insurance
First however, this is a good time to mention the term risk. Risk is a basic premise found behind every insurance policy issued and the concept of risk and the idea behind it is relatively easy to understand. In simple terms it is all about statistics and probabilities and can be explained as the chance of something going wrong.
Effective risk management is critical to business success and the insurance industry employs highly skilled individuals known as actuaries to aid in risk management. These individuals use a combination of strong analytical skills, business knowledge and understanding of human behavior to design and manage programs that control risk.
So you say, “That is interesting but how does it apply to what I pay for my automobile insurance?” To answer simply, you are a risk to the insurer.
In order to calculate what level of risk that you will present to the insurer, your characteristics will be analyzed based on two specific factors known as Underwriting and Rating.
Underwriting: How Car Insurance Cost is Evaluated
Although much could be said here, for the sake of time understand that underwriting has to do with the assumption of financial responsibility. If an insurer provides you with a policy, they are underwriting, meaning that the company will have financial responsibility to pay a claim should the need arise. Here the topic of risk comes into focus. How does the insurance company determine how much should be charged for a car insurance premium?
First, with any policy issued, limits are set for specific incidents that could potentially be paid via a claim. Remember that actuaries have worked through the statistics and probabilities of the various aspects of insuring against a specific risk. Their work is a foundation to the underwriting process. Building on this foundation, limits are set for various events that could be covered. By setting limits, an element of control is provided.
It is appropriate to keep in mind that insurance companies are not charitable organizations. They are in business for the purpose of making a profit. Search for the most affordable car insurance you can find, but understand that car insurance prices vary between insurance companies and may change as a result of a company’s financial situation.
Second, the premium is established. The premium is your cost of car insurance. By taking into consideration numerous factors discussed below, the premium calculation is put on an individual and personal level specific to an individual.
Keep in mind, that the underwriting process could determine that you are not a good risk and your application for insurance for your car might not be accepted.
Rating: The Impact of Individual Characteristics on Car Insurance Premium
The second factor is rating. Put simply, rating has to do with determining what the premium will be based on the characteristics of the driver as well as characteristics of the automobile. When you apply for insurance, before you receive a quote on car insurance, you will be asked a series of questions to help determine the cost to insure you. These answers are fundamental to premium calculation. Information collected through these questions include:
Insurers want to know your past driving record and certain personal characteristics and then they group you with other similar drivers. Insurers review the claim history of your group to make projections about future claims.
Age, Gender & Where You Live
There are some rating factors whose characteristics you cannot control. Examples include your age and gender. Then there are some rating characteristics which could technically be controlled but such control may not be practical or realistic. To explain, think about where you live. Geographic location can have a definite impact on rating. For example, if you live if a highly populated area with a higher probability of accidents then this will carry a higher risk of claims versus a less populated area; however, to pack up and move just because of your vehicle insurance rates sounds rather silly.
What You Drive
There are other characteristics that can be controlled, such as the make and model of the vehicle that you choose to drive. A vehicle with few safety devices and a powerful engine carries a greater risk of high claims than a less sporty model. The choice of vehicle however is controlled as it is totally your decision.
Insurers also consider lifestyle characteristics in the underwriting process. These characteristics include marital status and employment history. From prior claims data, insurers know that married persons tend to have lower claim levels than unmarried persons. Other statistics show that persons who work in the same place for a long time tend to have lower claims.
Also, underwriting criteria can include credit history. Those with a good credit will be deemed to be more responsible as they handle their finances well. That responsible behavior in turn will be viewed positively as a lower risk and grouped accordingly.
Do you see the pattern? Insurance rates are based on statistics that each company has collected. For example, if statistics indicate that teenage drivers are found at fault in more accidents, then that company will charge a higher rate for that category because, as a group, they will increase the need for funds to cover the expense of claims. In other words, the higher the losses from a group, the higher the rate for that group.
Keeping this same thought in mind, it is important to understand that the most influential aspect on the rating process is claim frequency. This does not mean how many times that you personally have made an insurance claim, although that will have an additional effect; however, claim frequency measures how often an insured event occurs within a group relative to the number of policies contained in that group. Persons sharing characteristics with a high claims group will be charged more for insurance coverage.
At the same time, persons who share characteristics with low claims classes will be charged lower rates. In addition, insurance companies offer discounts to individuals that exhibit certain characteristics.
So what can you do? Other than your choice of automobile, the most influential factor over which you have control is your driving record. A person with a clean driving record will pay less than other drivers.
Considering this information, what can you do to find a affordable car insurance plan? Compare car insurance plans! Prices for the same coverage can vary widely from one company to another since not every insurer will rate you exactly the same. One company may consider you higher risk because of where you live whereas the next company may rate that item differently.
Be Proactive – Get New Quotes for Car Insurance Annually
Being a proactive, responsible driver can help you avoid many situations that might otherwise result in a claim against your affordable car insurance coverage. Being a complacent driver can cost money. Make it your aim to review your coverage’s on at least an annual basis and get new quotes to make sure you have the most affordable coverage for your vehicles.
Edward Ferrell is a graduate of Auburn University with over 20 years experience in the financial services and technology sectors. He recently started his own marketing and e-commerce company with the intent to focus on a number of niche e-commerce markets.
Edward understands from a deeply personal level that life is filled with challenges. He says that some challenges we face are due to our own good or bad decisions while other challenges are somewhere down the road just waiting for us to get there.