Insurance Rates, Why Do Some Pay More or Less?

It is always fascinating to see how a product or service is priced. We all know that gas prices are highly volatile, while food prices are driven up by inflation and, of course the price of gasoline. What about the rates for other products or services like auto insurance?

Auto insurance rates are affected by so many factors, that it would be impossible to write an entire essay on the topic. To save you time, I will briefly outline the main factors that influence auto insurance premiums. Rates are influenced by market competition and individual risk factors.

Market competitivness simply means the number of companies that are after the same client. Your premium rate will drop if there are more companies after you. Premiums can plateau or even rise as demand decreases. This is what insurance calls a “hard market”. A hard market is one where insurance companies care more about reducing their losses and maintaining stable premium volumes than about growth. This puts the consumer in a position of least bargaining ability, which means that they pay higher rates.

Insurance markets are very much like a pendulum with periods of soft and hard. We have witnessed a prolonged period of soft market competition over the past decade. Insurance companies have had to come up with new ways to attract new customers and lower rates by allowing people to shop around more. The market will eventually become more competitive and it will be harder for consumers to get the lower premiums to which they are used to. The good news is that the market will soften once more people switch to lower rates companies.

Individual rating factors are the next biggest factor that can impact your premium. These are your personal details which help to determine your rate. Teenage males are more likely to be involved in accidents than teenage girls. This results in higher premiums for teenage boys, regardless of their driving record. Although this might seem discriminatory, it is just the truth. It has nothing to do with statistics.

These are some of the most common rating factors for car coverage:

  • Age: Higher rates are likely for older drivers and younger drivers. However, this is not true. Every insurance company handles age differently. You hear that age 25 is the minimum age to start seeing lower rates, and 75 the maximum for higher rates. Although it may seem true, it is not often the case.
  • Credit Not all states allow credit scoring for insurance purposes, but many do. Bad credit usually means that you will pay more for insurance. It is a good idea if you fall in this category to get multiple quotes as some companies are more dependent on credit than others. Insurance companies use credit to rate their clients because of the statistical correlation between claims frequency and bad credit.
  • Driving/Claims History This is a simple fact. You’ll get a higher rate for multiple traffic tickets than for someone with a clean record. A driver who has too many tickets may be denied insurance. This could mean that you have fewer options when it comes time to purchase insurance.
  • Discounts– Discounts are a popular way to lower rates in insurance. Although discounts are often used as a marketing tool, discounts in insurance are almost always actuarially factored so that those with lower risk will get better rates. Example: A married couple who owns a house will get a lower rate than someone renting. Statistics show that married people with homes are more likely to file a claim. A continuous policy of insurance is another way to get a significant discount. An independent agent can offer quotes from multiple insurance companies and help someone who isn’t eligible for the majority of average discounts to get better rates.
  • Your Car – Although this factor does not depend on you, the type of car that you drive will have an impact on your rate. Because every insurance company rates vehicles differently, this is yet another reason to get multiple quotes. Based on how an insurance company rates a car, you might see variances up to 50%