Companies have to balance premiums with compensations. That is why, one of the key factors that affect auto insurance rates is the claim settlements. As the prices are determined at the beginning, they have to foresee the possible losses they may suffer. They have several tools to calculate damages and historical information is one of them.
When a motorist applies for a vehicle insurance quote they look at his or her records. However, these figures are not enough on their own and age, gender and location demographics are included in the equation. Your likelihood of having or causing an accident has to be estimated based on personal and external factors.
Essentially some drivers will have several claims and others will not have any for a long time. General view is that past performance is the indication of future dangers or safety. That is why, having a clean history with no incident and traffic violation ticket for three years qualify motorists for large discounts.
On the other hand, they may face surcharges for other statistically significant factors like being a teenager, living in a high crime or bad weather zip code, having low credit score and even being a male. They may apply both discounts and surcharges to an applicant.
Automobile insurers will not be in trouble for getting the risk assessment of one driver wrong and he or she ends up causing large losses. But they have to get the assessment of an average driver in certain age group, gender, financial position and zip code bang on. Then, one unexpectedly dangerous or safer policyholder will only be seen as deviation from the median figures and they will even each other out.
Statistically Significant Data for Car Insurance
According to the Property Casualty Insurers Association of America, an average driver has an accident every 18 years approximately. There are roughly 10 million small and large incidents every year and the scale tips on the smaller end. According to National Safety Council only 3/1000 crashes result in fatalities.
Then, they need to know the cost per vehicle. For example, according to the Insurance Research Council, the average cost of traffic related injuries is around $23,500. So, one of the main factors that will determine if a company would make money at the end or not is the composition of its policyholders.
Doing a good job of pricing bad drivers out would tip the balance in their favor in terms of avoiding claims. Usually, larger carriers are more successful in this area because they employ the best of mathematicians, actuaries and underwriters, as well as allocating large funds for research and customer surveys.
What Are the Premiums Really?
Technically, they are installments to pay for the one accident a typical driver is expected to have every 18 years. You may or may not have them or have more or less than average. By contributing to the pool, you make sure there is enough money to pay for the damages when you have an accident.
It may be friends’ or neighbors’ turn to get paid this year and someone else’s next year. Insurance is a commercially organized way of taking care of each other’s losses. At the end of the process if carriers can make a little bit of money for the risks they take they are happy. Surprisingly this doesn’t happen often enough due to heavy competition in the market.
They have to set premiums low enough to sell many policies because volume counts. The higher the number of pool members the better the chance of getting consistent averages. They also need to make sure that there are enough profit margins for them to remain as a viable business.
Are Premium Calculations Totally Based on Averages?
It is in a way the case but not entirely. You personally can prove to be better or worse than a typical applicant that determines if you would get discounts or surcharges. Then, they will look at others listed on the policy as well as looking closely to the vehicle. You may have a great record but may end up paying ton of money because your car is known to cause plenty accidents and large damages each time.
You can control some of the variables in your favor. You can also reduce the costs by shopping around for the cheapest quotes. As mentioned above, some vehicle insurers are sharp enough to make profits with tight premiums. And Some get their numbers wrong and expect policyholders bail them out by accepting higher rates. The interesting thing is that the market provides enough people to subscribe to both camps.
The moral of the story is that you are poked and prodded. Some of them will like you and others will have a sour face seeing your application. So, your job is to find that one company that will offer you the best price based on what they see on the proposal form.
Another way of looking at it is that you would be looking for the pickiest one when you are the cream of the crop because they are the one that will offer the highest rewards for you. And you would be looking for the one that has to scrape the bottom of the barrel when you have a terrible history and be prepared to shoulder one or two surcharges.