How do car insurance companies calculate risk?
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UPDATED: Mar 13, 2020
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Car insurance companies base their premiums on the risk of a driver needing to file a claim. Ideally, a customer would have insurance for his or her lifetime without ever needing to file a claim; the insurance company could then collect premiums from that policyholder without spending any money. Most people do end up needing their insurance at some point in their lives, however. In order to compensate for that risk, the insurance company demands higher premiums from people who are likeliest to file multiple claims.
Risk calculations can be extremely complex and take into account several factors, from a person’s marital status to his driving record. Not all factors are looked at equally, and the exact formula used to determine rates varies from one place to another. In most cases, a computer program actually calculates the rates based on certain criteria being input into the system, meaning that the insurance agent who sells your policy will probably not know exactly what caused your rates to be what they are. Your agent can probably give you a general idea of why your rates are what they are.
Car insurance companies rely heavily upon statistics when deciding rate calculations, especially when insuring new drivers or people who don’t have much driving history. They will look at the insured’s age, marital status, credit score and where they live. Some statistics may apply differently than you would expect.
People in rural areas, for example, pay less for insurance than those in cities; congested city traffic can lead to more car accidents. Cities also have a higher risk of theft and vandalism. People with poor credit are more likely to file insurance claims for very minor damage than those who have more secure finances.
Age plays the heaviest role in an insured’s rates. Teenagers and young adults, especially young men, pay higher rates than almost any other demographic. Young drivers have less experience and are statistically more likely to get into accidents.
The Vehicle’s Value
In addition to the insured on the policy, the vehicle being insured also factors into the rates charged for insurance. If a vehicle is expensive to repair or replace, it will cost more to insure. Insurance companies charge high premiums in these cases to compensate for the possibility of needing to replace the vehicle if it is destroyed in a car accident.
Vehicles with low safety ratings are also more expensive to insure than vehicles that are safer. If vehicles have any known problems that can cause accidents to occur, they will cost more to insure; cars that sustain more damage during collisions are also more expensive to insure.
The most expensive vehicles to insure are sports cars and luxury vehicles. Least expensive cars to insure include minivans and some sedans.
Your Driving History
The most important element of your risk assessment is your own personal driving record. If you have a history of claims, you pay higher insurance rates on your policy. If you are found at fault for an accident, it will do more damage to your premiums than if someone else is at fault for the accident.
Your claims are not the only element of your driving history that affect your rates. Your insurance company will also check to see if you have any history of DUI, traffic violations or other types of legal infractions. If you are found to be a particularly high-risk driver, you may be dropped by your insurance company and forced to pursue a high-risk policy from another provider.
How to Lower Your Car Insurance Rates
If you want to lower your insurance rates, there are several ways to reduce your risk including:
- Take an advanced driver’s education class, such as defensive driving
- Install an anti-theft device or other security devices into your vehicle
- Bundle your coverage with other types of insurance, such as homeowner’s insurance, with the same company
- Take advantage of any student or military discounts you might qualify for
- Whenever you buy a new car, consider purchasing one with a higher safety rating
The best way to keep your rates low is to maintain a good driving record and make smart choices regarding your vehicle. Not only will driving safely keep your insurance rates low, it also keeps your family safe, which is priceless.