One of the key factors that affect auto insurance rates is the claim payments insurers have to make. They have to balance the premiums collected with the claims paid. As the premiums are collected at the beginning, they have to foresee the possible losses they may suffer. They have several tools to calculate likely losses and historical information is one of them.
When a motorist apply for vehicle insurance they look at his/her past accidents and driving records. However, these figures are not enough on their own. Companies have to include the age, gender and location demographics into the equation. Your likelihood of having or causing an accident has to be estimated.
Essentially some drivers will have claims and others will not. That is why companies start giving serious discounts to drivers once they are over their teen ages and prove that they are good drivers with no claims and traffic violation tickets. Still you may be penalized for the demographics relating to you, like living in a big city with heavy traffic and high crime rates.
Vehicle insurers will not be in trouble if they get their risk assessment of one driver and he/she ends up causing large losses. But they have to get the assessment of an average driver in certain age, gender group and zip code bang on. Then, one loss caused by one driver will be evened out by another driver who turned out to be safer than estimated.
Statistically Significant Data for Vehicle 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 accidents every year. Most of these are small incidents. According to National Safety Council only 3/1000 accidents result in fatalities.
Then, they need to know the average cost of each accident. For example, according to the Insurance Research Council, the average cost of injuries in accidents is around $23,500. These numbers and number of policyholders determine the premium structure for each company. Some companies may have more cautious drivers in general or do a good job of shifting out risky drivers that their accident ratios may be lower.
What Are The Premiums Really?
Technically, they are installments to pay for the one accident an average driver is likely to have every 18 years. You may or may not have them or have more than average. By contributing to the pool of premiums collected by companies you make sure there is enough money to pay for the damages when you have an accident.
It may be your friends or neighbors to have an accident this year and they get paid and someone else next year. Insurance is a commercially organized way of taking care of each other’s losses. At the end of the process if auto insurers can make a little bit of money for the risks they take they are happy.
They have to set their premiums low enough to attract enough participants to their policy packages. 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?
That is definitely not the case. If you appear to be better than the average driver you get to pay less. There are a few points more to consider for the companies before they give you an auto insurance quote. Your driving history, age, gender, credit score, zip code and type of car you driver are some of them.
You can control some of the variables in your favor. You can also reduce the costs by shopping around for the best deals. As mentioned above, not every company is sharp enough to make profits with tight premiums. Some get their numbers wrong and make their policyholders suffer for it with high premium charges.
What you are looking for is a company that is right for you. If you are a good driver you are looking for a company that rewards good drivers with low car insurance rates and penalize the bad ones by demanding more money. If you are not as clean a driver as most companies would like you are looking for a company that is more lenient towards imperfections in your records.