Ever wonder how car insurance costs are determined? Are you feeling like the bullseye on the dartboard, where you are the target for the highest rate? Understanding the factors that affect automobile insurance premiums can help to alleviate these feelings.
The Risk of Car Insurance
This is the best time to talk about risk. Every insurance policy is built on risk. The concept and idea of risk is fairly simple. It is simply statistics and probabilities that can be described as the possibility of something going wrong.
Achieving business success is dependent on effective risk management. The insurance industry employs highly qualified individuals called actuaries to help with risk management. They combine strong analytical skills with business knowledge to create and manage risk-control programs.
You might say, “That’s interesting but how does that apply to my auto insurance?” Simply put, you are a threat to the insurer.
Your characteristics will be evaluated based on two factors, Underwriting and Rating. This will allow you to determine the level of risk that you pose to the insurer.
How Car Insurance Costs are Evaluated
While there is much to be said, it is important to understand that underwriting refers to the assumption of financial liability. Underwriting means that an insurer will provide you with a policy. This means that they will be responsible for paying any claim. This is where the subject of risk becomes important. How does an insurance company decide how much to charge for car insurance premiums?
First, any policy will have limits for certain incidents that may be covered by a claim. Actuaries are experts in analyzing the probabilities and statistics of each aspect of insuring against a particular risk. Their work provides the foundation for the underwriting process. This foundation is the basis for setting limits that can be used to cover various events. Limits provide control.
Insurance companies are not charities. Insurance companies are there to make a profit. You should search for the cheapest car insurance, but be aware that prices can vary among insurance companies and could change due to a company’s financial position.
The premium is then established. The premium is the cost of your car insurance. The premium calculation is based on many factors, including those discussed below. It is calculated at an individual level and specific to each person.
Remember that underwriting could decide that you are not a risky candidate and that your application for car insurance might be rejected.
Rating – The Impact of Individual Characteristics On Car Insurance Premium
Rating is the second factor. Rating is simply the ability to determine the premium based on both the characteristics of the driver and the car. Before you can get a quote for car insurance, there are a few questions you’ll need to answer. These questions are essential to premium calculation. These questions provide information that can be used to calculate premiums.
Driving Record
Insurers will want to see your driving history and other personal characteristics before they assign you to a group of similar drivers. To project future claims, insurers review the claim history for your group.
Your Age, Gender and Where You Live
Some rating factors are not controllable. Your gender and age are two examples. There are also some rating characteristics that can be controlled, but this may not be possible or practical. Think about your location. Ratings can be affected by your geographic location. If you are in a densely populated area, with higher chances of accidents, then your rating will be higher. However, it is not wise to move just for vehicle insurance rates.
What Drives
Other characteristics can also be controlled such as the make/model of the vehicle you choose to drive. High-risk vehicles with fewer safety features and powerful engines are more likely to be sued than those that have more sporty models. You have complete control over the vehicle you choose.
Lifestyle Characteristics
Lifestyle characteristics are also considered by insurers in the underwriting process. These characteristics include marital status, employment history, and other personal information. Insurers know from prior claims data that married people have lower claims than those who are not married. Statistics also show that people who have worked in the same location for a long period of time are more likely to file lower claims.
Credit History
Credit history can also be considered underwriting criteria. People with good credit are more responsible if they manage their finances well. This will lead to a reduction in risk, and you will be grouped accordingly.
Do you see the pattern here? Each company collects statistics to determine the insurance rates. If statistics show that teenage drivers are more at fault for accidents than others, the company will charge a higher premium for this category. This is because they have more claims and will need to pay more money. This means that the rate charged for a group will be higher if it suffers more losses.
Claims Frequency
This is why it is important to remember that claim frequency is the most important aspect of the rating process. While this does not necessarily refer to how many times you have filed an insurance claim, that can have an additional impact. However, claim frequency is a measure of how often an insured event occurs within an organization relative to how many policies are in that group. Insurance coverage will cost more for those who are part of a high-claims group.
People who have low claims will also be charged lower rates. Insurance companies also offer discounts for individuals who have certain characteristics.
What can you do? Your driving record is the most important factor that you can control. Driving record that is clean will get you a lower rate than other drivers.
What can you do with this information to find affordable car insurance? Compare car insurance plans. The prices for the same coverage may vary from one company to the next because not all insurers will rate you the same. The risk of you living in a different area may make one company more likely to rate you, while the other company might rate you differently.
Get new quotes for car insurance annually
You can avoid many situations that could lead to a claim against affordable car insurance. Complacency can lead to high costs. It is a good idea to check your coverage at least once a year and to get new quotes in order to ensure you have the best coverage possible for your vehicle.
Edward Ferrell graduated from Auburn University and has over 20 years of experience in technology and financial services. With the intention to concentrate on niche markets, he recently founded his own marketing and eCommerce company.
Edward knows from a deep personal level that life is full of challenges. Edward believes that while some of the challenges we face can be attributed to our bad or good decisions, others are just waiting for us.
