How Insurers Determine my Auto Premium:
Many factors affect the auto premium I pay, including which insurance company I choose. I make it point to understand how insurers determine my auto premium, prior to making decisions, choices, or acting in certain fashions. I shop around companies and with the help of new quote comparison tools, it makes it even easier.
I do this for most consumer and business purchases, researching the costs & cause and effect of factors to manage my expenses.
Insurance company approach
Different insurance companies use different methods to rate their risk of insuring my vehicle and charge different premiums for similar coverage. Although I don’t have the specific metrics by each insurance company, I have a general framework of what impacts my premiums.
It would be interesting to see how each insurer rates and a more transparent system. I think that this is what companies like The Zebra are moving towards, cost comparison across platforms and carriers to better help customers.
Items that impact premiums
These items will likely affect my premium:
- My driving record, and the driving records of others covered by my insurance policy, during the last three to five years. Including my wife.
- My credit-based insurance score. The good news is my credit score is >800 and those with better scores often pay lower premiums. Good news for me. Some states restrict the ways insurers can use credit-based insurance scores and several states ban their use. If I were to fall on tough times, I would ask my insurer for a hardship exception, which they may or may not be willing to provide.
- The reason insurers use credit score is because studies show a correlation between this score and the likelihood of filing a claim. It’s important to note Credit-based insurance scores are different from other credit scores.
- My age, gender and marital status. People under 25, males, single people and families with young drivers in the household tend to have more accidents and therefore pay higher premiums. Luckily, in this situation, I left this statistical group a while ago. However, accident rates (and premiums) also tend to increase for people over age 65 (which I am approaching).
- The type of vehicle I drive. Generally, I will pay more for insurance, particularly for comprehensive and collision coverages, if your vehicle is newer or more expensive. I’ve discussed comp and collision in a separate article, but I don’t buy for one of my older vehicles (again I’ve been accused of being a penny pincher). Sports cars and high-performance vehicles cost more to insure because they’re involved in more accidents and thefts and cost more to repair, this is not the reason why I don’t have a sports car – see penny pincher definition. We have a smaller SUV, but a large SUV or truck, which can cause more serious damage in an accident, would also cost more for liability coverage and GAS.
- Where I live. Urban areas usually have more accidents and auto thefts than rural areas, I live in the suburbs but this is not rural enough to receive any favorable pricing.
- Vehicle use, including my annual mileage. With only two drivers and limited auto use, we are well below any use concerns or debits.
- My prior insurance coverage. Most insurance companies will charge my more if I don’t have auto insurance when you apply for coverage. I think I previously stated I go direct to Geico for auto, but if I chose to switch carriers this would be an issue if I was previously uninsured. Some also charge more if I currently have only the state-required minimum amounts of coverage – which I don’t.
- Previous claims. Most insurance companies report auto claims to one or more private nationwide claim databases. Insurance companies use these databases to see the claims I’ve submitted in the past. I can request a copy of my report but I am well aware of my claims history – very few accidents but I await the day of autonomous vehicles, so this frequency drops to zero.
- The limits I choose for liability coverage. Again, I make sure I have enough limits to appropriately cover my exposure and net worth, as well as attach to my umbrella policy. I don’t need a ventilated layer or exposure between umbrella and primary auto.
- The deductibles I choose for my coverages. As mentioned previously, I chose the highest deductible I can afford and set up a loss fund accordingly. A deductible is the amount I have to pay out-of-pocket on a claim before the policy pays the loss.
- Higher policy deductibles normally mean lower policy premiums and I consider the opportunity costs associated with those lower premiums. A policy with a $1,000 deductible should have a meaningful enough lower premium than the same policy with a $500 deductible. Having a higher deductible is a good way to save money on my auto insurance premium and keep me engaged enough and aware of my driving behavior. But I am always aware if I can afford the deductible in case I have a loss – see the article about rainy day fund.
Most insurance companies offer various types of discounts. Although I go direct, I call the company representative to ask if there’s a discount for:
- Insuring my auto and my home with the same insurance company. A bundling discount.
- Insuring multiple vehicles with the same insurance company.
- Protection devices such as airbags, anti-lock brakes and anti-theft devices.
- Taking a defensive driving course. Which I always take and renew my defensive driving course, the payoff for the course normally outweighs the cost and time.
- Being a member of an organization or working for certain company. Retirees don’t get the benefits but I still remain a member of various industry, alumni, and charitable groups.