Heidi Mertlich

Licensed Insurance Agent

Heidi works with top-rated insurance carriers to bring her clients the highest quality protection at the most competitive prices. She founded NoPhysicalTermLife.com, specializing in life insurance that doesn’t require a medical exam. Heidi is a regular contributor to several insurance websites, including FinanceBuzz.com, Insurist.com, Finance101.com, and Forbes. As a parent herself, she under...

Licensed Insurance Agent

Schimri Yoyo

Licensed Agent & Financial Advisor

Schimri Yoyo is a financial advisor with active insurance licenses in seven states and over 20 years of professional experience. During his career, he has held roles at Foresters Financial, Strayer University, Minnesota Life, Securian Financial Services, Delaware Valley Advisors, Bridgemark Wealth Management, and Fidelity.  Schimri is an educator eager to assist individuals and families in ach...

Licensed Agent & Financial Advisor

UPDATED: Jun 27, 2023

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UPDATED: Jun 27, 2023Fact Checked

Insurance companies can only profit when they collect more in premiums than they need to pay out in claims. Because of this, customers who have a high risk of auto accidents will pay more for auto insurance than people deemed to have a lower risk. Some people may be unable to obtain coverage at all if their risk is very high. Calculating risk is an important part of auto insurance, and insurance companies review numerous factors when determining what category of risk a driver qualifies for.

The single most important element of a driver’s insurance premiums is their driving history. People with a history of accidents will pay more for insurance than people who have never been involved in a collision. Additionally, people who routinely get traffic citations or who have been convicted of a DUI will pay higher premiums. Beyond driving records, insurance companies assess statistical data about a driver’s age, gender, marital status, geographic location, type of car being driven and more.

Generally, all drivers will fall into one of three categories of risk, and their premiums will be determined accordingly:

Preferred Risk

The safest drivers, these are individuals who have carried liability insurance with healthy minimums for at least a year without having to use their coverage. They have no at-fault auto accidents, a minimum number of not-at-fault accidents and have maintained a driving record clean of traffic violations.

These drivers have usually had a policy for several years and have good credit, especially in regards to paying their insurance. They may drive fewer miles per year and have a limited number of people with access to the insured vehicle.

Standard Risk

The majority of vehicle owners will qualify as standard risk drivers. These people may have only one or two problems keeping them from qualifying for preferred risk rats, and identifying that problem area can help them to save money on their auto insurance premiums in the future.

Standard risk drivers may have one or two traffic violations against their driving record, or they may have had an at-fault accident in the past few years. Their credit will be average to sufficient, and they will have had insurance for at least six months. Standard risk drivers with just a single point against them will usually have very competitive rates; as multiple flaws add up, the cost of the policy will increase.

High Risk

Drivers deemed high risk may pay extremely high insurance premiums, especially if they must carry full coverage to satisfy lien holder requirements on financed vehicles. Some insurance companies specialize in high-risk insurance and may offer competitive rates, but high-risk insurance will never be as affordable as insurance for preferred-risk drivers.

High-risk drivers are often placed into this classification after being involved in multiple at-fault collisions. Accident-free drives can still be classified as high-risk if they have numerous tickets or a single major violation, like a DUI conviction. People who have never had insurance before, who have allowed previous policies to lapse or who have very bad credit will also be placed in this category.

Beyond these risk categories, a driver’s insurance rates are also affected by things beyond the driver’s control. Risk is calculated at a geographic level as well as a personal level; some areas have higher premiums than others due to state laws and regulations. States with a high rate of uninsured drivers will also have higher insurance rates than others, and areas with a high risk of theft will be considered higher-risk states than other locations.

Finally, an insurance company may raise the rates in a state where they have recently lost money in paying numerous claims following catastrophic weather events. Because all of these factors are outside of a driver’s control, it’s a good idea to focus on your own safe driving habits as a way to counteract the effects of geography and other situations.

Saving Money on Car Insurance

Insurance risk level is a fluid concept. All new drivers will begin as high-risk until they have proven that they have safe driving habits and are responsible with paying their premiums. Drivers can easily move from one category to another; high-risk drivers can focus on safe driving for several years to reduce their premiums, whereas a single at-fault accident can damage the driving record of preferred-risk drivers. It’s a good idea to strive for the lowest risk possible so that you can enjoy the widest selection of affordable insurance companies.

While you work on improving your driving record, you can reduce the cost of your insurance by taking defensive driving classes, installing anti-theft devices in your vehicle, purchasing multiple lines of insurance with a single carrier or reducing the amount of coverage on your policy. You can search for a new insurance company online by obtaining a free quote, or you can speak with your existing insurance company to see if there are any ways you can change your coverage to reduce the premiums.

Case Studies: Understanding Risk Categories in Car Insurance

Case Study 1: Preferred Risk Driver

In this case study, we examine the profile of a preferred risk driver. This individual has maintained a clean driving record with no at-fault accidents and minimal not-at-fault accidents. They have carried liability insurance with healthy minimums for over a year and have good credit.

Additionally, they drive fewer miles per year and limit access to their insured vehicle. We explore how their low-risk status affects their insurance premiums.

Case Study 2: Standard Risk Driver

In this case study, we focus on a standard risk driver. This category includes the majority of vehicle owners who may have one or two issues preventing them from qualifying for preferred risk rates.

We delve into the factors that contribute to their standard risk status, such as having one or two traffic violations on their driving record or a recent at-fault accident. We discuss how these factors impact their insurance premiums and provide insights on how they can save money on their coverage.

Case Study 3: High-Risk Driver

Our third case study revolves around a high-risk driver. These individuals often face significantly higher insurance premiums, particularly if they require full coverage for financed vehicles.

We explore the reasons why a driver may be classified as high risk, including multiple at-fault collisions, major violations like a DUI conviction, or a lack of prior insurance coverage. We discuss the challenges high-risk drivers face and potential options for obtaining affordable insurance.

Frequently Asked Questions

What are the Categories of Risk?

There are many ways to categorize risks, but one common approach is to group them into the following categories:

  • Strategic Risk: Strategic risks are those that arise from the organization’s business strategy and may impact the long-term success of the organization. Examples of strategic risks include changes in market conditions, competitive pressures, technological advances, and regulatory changes.
  • Financial Risk: Financial risks are those that arise from the organization’s financial operations and may impact its financial stability or profitability. Examples of financial risks include market volatility, credit risk, liquidity risk, and interest rate risk.
  • Operational Risk: Operational risks are those that arise from the organization’s day-to-day operations and may impact its ability to deliver products or services. Examples of operational risks include human error, system failures, supply chain disruptions, and natural disasters.
  • Compliance Risk: Compliance risks are those that arise from non-compliance with laws, regulations, or industry standards and may result in legal or financial penalties. Examples of compliance risks include data privacy violations, anti-money laundering violations, and environmental violations.
  • Reputational Risk: Reputational risks are those that arise from negative perceptions or public opinion about the organization and may impact its brand, customer loyalty, or stakeholder trust. Examples of reputational risks include product recalls, data breaches, and unethical business practices.
  • Legal Risk: Legal risks are those that arise from legal disputes or litigation and may result in legal or financial penalties. Examples of legal risks include contract disputes, intellectual property infringement, and regulatory investigations.
  • Environmental Risk: Environmental risks are those that arise from the organization’s impact on the environment and may impact its sustainability or social responsibility. Examples of environmental risks include pollution, climate change, and resource depletion.

What are the categories of risk that insurance companies use to determine premiums?

Insurance companies typically assess drivers’ risk levels based on:

  • driving history
  • demographic information
  • geographic location
  • type of car being driven.

Drivers are usually classified as:

  • Preferred risk drivers: who have a clean driving record, no at-fault accidents, a limited number of not-at-fault accidents, and have carried liability insurance with healthy minimums for at least a year
  • Standard risk drivers: are the majority of vehicle owners and have average premiums.
  • High-risk drivers: may pay higher premiums or be unable to obtain coverage at all. Have a history of accidents, traffic violations, or DUI convictions.

 

How do insurance companies determine the risk level of a driver?

Insurance companies use a variety of factors to determine a driver’s risk level including:

  • driving history
  • age
  • gender
  • marital status
  • geographic location
  • type of car being driven and more.

Is it possible to get car insurance with a bad driving record?

Yes, it is possible to get car insurance with a bad driving record, but you may have to pay higher premiums or work with a high-risk insurance provider. It’s important to compare quotes from multiple providers to find the best rates.

How do insurance companies assess risk?

Insurance companies use a variety of factors to assess risk including:

  • type of policy
  • age
  • health status of the policyholder
  • geographic location, and other relevant data.

They may also use statistical models to predict the likelihood of certain events occurring and to calculate the expected cost of claims.

What is underwriting in insurance?

Underwriting is the process by which an insurance company evaluates the risk associated with a particular policy or potential policyholder. The underwriter assesses various factors, such as the applicant’s health status, occupation, and past insurance history, to determine the level of risk and the appropriate premium for the policy.

What is reinsurance?

Reinsurance is a form of risk management in which an insurance company transfers a portion of its risk to another insurer or group of insurers. Reinsurance can help insurers manage their exposure to large losses and ensure that they have adequate financial resources to pay claims.

How do insurance companies manage risk?

Insurance companies manage risk through a variety of strategies including:

  • diversification
  • underwriting controls
  • reinsurance
  • risk-based capital requirements

These strategies help to minimize the impact of losses and ensure that the company remains financially stable over time.

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Heidi Mertlich

Licensed Insurance Agent

Heidi works with top-rated insurance carriers to bring her clients the highest quality protection at the most competitive prices. She founded NoPhysicalTermLife.com, specializing in life insurance that doesn’t require a medical exam. Heidi is a regular contributor to several insurance websites, including FinanceBuzz.com, Insurist.com, Finance101.com, and Forbes. As a parent herself, she under...

Licensed Insurance Agent

Schimri Yoyo

Licensed Agent & Financial Advisor

Schimri Yoyo is a financial advisor with active insurance licenses in seven states and over 20 years of professional experience. During his career, he has held roles at Foresters Financial, Strayer University, Minnesota Life, Securian Financial Services, Delaware Valley Advisors, Bridgemark Wealth Management, and Fidelity.  Schimri is an educator eager to assist individuals and families in ach...

Licensed Agent & Financial Advisor

Editorial Guidelines: We are a free online resource for anyone interested in learning more about car insurance. Our goal is to be an objective, third-party resource for everything car insurance-related. We update our site regularly, and all content is reviewed by car insurance experts.