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How Do They Figure Out The Rates? 

Insurance companies don’t see us the way we see ourselves. They see us as a risk. Think of it this way. Imagine if your friends and family all asked you if they could borrow money. Now assuming you have a limited amount of money, how would you decide who to lend to?

Whether you realize it or not, you’ve probably already started the task of risk assessment. You’re probably ranking them from best to worst in odds of repayment. You’re most likely trying to recall everything you can about their past performance with regard to finances and responsibility. You may not even know some of them that well, so you may have to compare them to other groups of people you know better who share similar financial situations and lifestyles.

Insurance companies perform the same assessment of us, using data compiled over several years to try to predict, by as small a group as possible, the number and types of claims for monetary damages we may make. Then, of course, charge accordingly.

Insurance companies use rating factors to determine what your rate will be. Not all of these factors are used in all states, as some State Departments of Insurance have ruled a few of the factors unfairly discriminatory (sometimes as a result of lawsuits filed against the insurance companies).

Below is a summary of the rating factors insurance companies use to determine how much they charge:

Age – Generally, the younger the driver, the higher the rate. As we age, we of course gain more experience behind the wheel.

Use of Vehicle – You may use your car for business every day, which is generally more expensive, or perhaps you only drive for pleasure, which means you probably drive it less than a car used for business. Most of us simply use our cars to drive to work, which is usually rated somewhere between pleasure use and business use.

Sex – Women typically have less auto accidents than men, so their rates are usually lower.

Location – Normally, this is referred to as the “garaging address.” Basically, wherever you live and park your car at night. Because there are more cars in densely populated areas, the probability of getting into an accident is higher, so city rates tend to be higher.

Marriage – This rating factor is geared toward males. Unmarried males, when younger, have more accidents than married males, so unmarried males have to pay more for their auto insurance.

Limits of Insurance – The higher your liability limits, meaning the more money the insurance company would have to pay if you are found liable (at fault) for an accident, the more they are inclined to charge you. This should not deter you from choosing high limits, as higher limits provide more protection.

Driving Record – There are two reports typically used to determine your driving record. A motor vehicle record, or MVR, and a C.L.U.E. report. The MVR tracks automobile claims, and the C.L.U.E. report tracks claims you have made for any type of insurance. Of course, the more accidents and tickets found on your record, the higher your insurance rate.

Type of Vehicle – Without getting into too much detail, more expensive cars call for higher insurance rates. However, it is important to note that this is only the case if you request physical damage coverage. If you do not request this coverage, the insurance company is not responsible for repairing or replacing your car in the event of an accident.

Deductible – The higher the deductible you choose, the lower your insurance rate.

It is worth pointing out that car insurance rates are subject to state regulation, meaning insurance companies ARE NOT allowed to charge whatever they want. State Departments of Insurance make sure individuals are not charged an unreasonable amount of money, but also ensure insurance companies charge enough money to cover all of their estimated claims.

State Departments of Insurance also make certain the rates insurance companies charge are not unfairly discriminatory. For example, charging senior citizens an exorbitant amount of money because they may be viewed as “dangerous” drivers is discriminatory.