How Does Auto Insurance Tier System Work?

Lately, personal lines insurers have been adding various new rating variables to price each applicant more precisely. Additional data allows them group drivers and differentiate rates for each group. These car insurance tier rating systems help to ensure that good drivers don’t subsidize bad ones. This fairly new underwriting structure distinguishes careful and considerate drivers with better credit score and reward while marking reckless drivers with apparent financial problems and penalizing accordingly.

Today carriers don’t just look at past claim and driving history to decide how much premium to charge. Instead, they try to predict who is more likely to make a claim and who wouldn’t. One of the widely used factors in this process is credit rating. Various studies shows that people with better credit score are less likely to make a claim. This information is influential (where allowed) on modern rate setting.

Although auto insurance rating tiers were first used just before the millennium it is now widely utilized by most insurers to make sure they price each applicant’s premium as sharp as possible. Some companies can have tens of different rate tiers and can still give quotes to prospective clients in a jiffy thanks to programming advancements.

Each state authority supervises the carriers operating within their borders. So, auto insurers must explain how their tiered rating works and underwriting rules applicable to each tier and seek approval from state insurance commissioner before they can use it. One of the main rules is that grouping and underwriting principles mustn’t be discriminatory.

What Are the Commonly Used Vehicle Insurance Tiers?

For the sake of simplicity, most commonly used risk ratings are Preferred, Standard, Non-standard and Assigned risk. Sub-groupings may be used to facilitate further levels. Preferred drivers usually have near perfect driving and credit score and therefore get the best prices. About 50% drivers fall in the standard group with one or two issues in their Motor Vehicle Records (MVR) and have good credit. A driver can be classified as non-standard for many reasons including the uniqueness of their car and foreign driving license but usually they are high risk due to their claim history and credit record. Assigned risk describes the group of motorists who find it hard or impossible to get any coverage.

You should also keep in mind that cars are categorized according to their insurance ratings. Furthermore, zip codes have their own assessments based on the claims and crimes in them. So, any automobile insurance premium calculation program can go through a few risk segmentations before spitting out a quote.

Benefits of Rate Tiers in Auto Insurance

Traditionally, premiums would have been affected pretty sharply after just one accident or ticket because MVR, age, gender, zip code and type of car were the main factors. In their attempt to determine car insurance prices fairly and accurately carriers have been considering various new factors that help them figure out who is low or high risk.

One of the key benefits of this pricing system is that one mistake doesn’t necessarily ruin your good driving record and raise your premium through the roof. Being an established and reliable driver with good credit score, owning your home, living in a nice neighborhood are the kind of things that can help you keep rates low even after an accident. However, people with bad credit and living in poorer areas may end up paying more even if they have better driving history.

How Can Motorists Make the Most of Tier Rates?

One key point to remember is that each company has their own rate grouping and premium calculation methods. So, while you can hardly make the standard risk group with one insurer the other may put you into the preferred group and offer you better rates. That is why you need to check prices with a few companies before rushing into a decision.

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