It’s always interesting to consider how any product or service is priced. We all know that Gas prices are highly speculative where as food prices are often driven up by inflation and of course, the price of gas! But what about rates for other products and services, such as auto insurance?There are so many factors that influence auto insurance rates, it would take reading several essays on the subject to cover every detail. To spare you the time, I am going to outline some of the common principles that affect auto insurance premiums. The two largest things that impact rates are market competitiveness and individual risk factors.Market competitiveness just means how many companies are after the same customer. The more companies that after your premium dollars, the lower your rate. However, as the demand for new customers decreases, premiums can start to plateau or even go up! In insurance speak, we call this a “hard market”. In a hard market, the insurance companies are more concerned about curving their losses and maintaining a stable premium volume than they are about growth. Unfortunately for the consumer, this means higher rates because they are put in the position of least bargaining power.The insurance markets behave very much like a pendulum, with periods of hard and soft. What we have seen in the last decade, is a long duration of soft market competitiveness. People shop around a lot more which has caused insurance companies to find new ways of attracting new customers and lowering rates. Eventually, the market will harden and consumers will find it more difficult to receive the lower premiums they became accustomed to. The good thing is, the market will usually soften again once people begin switching to other companies as lower rates become available.The next largest thing that impacts your premium are individual rating factors. These consist of your own personal details that help determine your rate. For example, teenage males tend to get into more accidents than teenage females. The result is higher premiums for teenage males, regardless of driving history. As this may be discriminating, it is simply the truth and it has everything to do with statistics.Some of the common rating factors for car insurance are:Age – Younger and older drivers are more likely to have higher rates. This is not fact, every insurance company deals factores age differently. It’s common to hear age 25 as the magic number to begin seeing lower rates and 75 for the higher end. While there may be some truth to this, it usually does not happen all at once and again, it’s simply not always the case.
Credit – Not all states allow the use of credit scoring for insurance, but most do. Having bad credit normally means paying more for insurance. If you fall into this category, it would be a good idea to get multiple quotes because some companies depend on credit more than others. The reason insurance companies use credit as a rating factor is due to the statistical correlation between bad credit and claims frequency.
Driving/Claims History – This one is obvious, you’re going to get a higher rate if you have multiple traffic tickets than someone who has a spot free record. In some cases, a driver with too many tickets can be denied by the insurance company which means fewer choices when it comes to buying insurance.
Discounts – Believe it or not, but discounts are one of the most popular forms of lowering rates in the insurance world. While most consider discounts as a promotional tool, insurance discounts are almost always actuarially factored to give better rates to those who pose a lower risk. Example: Someone who is married and owns a home will likely get a better rate than someone who is renting and single. This is because statistics have shown that people who are married and own homes are less likely to file a claim. Another significant discount is just simply having continuous insurance! Someone who does not qualify for the bulk of average discounts would find better rates through an independent agent who offers quotes from several insurance companies.
Your Car – This factor is not based off you individually but the type of car you drive can impact your rate. This is another reason why it’s important to get multiple quotes because every company rates vehicles differently. You may see differences up to 50% just based off how an insurance company rates a particular carI hope this article helps answer some of the common questions that get asked when discussing car insurance rates.