2010-03-24
How Insurance Premiums Are Figured

Auto insurance is a necessity you purchase in case some calamitous event befalls you in the future.

One may wonder how auto insurance companies figure premiums costs to cover future events that may or may not happen.

Auto insurance actuaries use several facts when determining auto insurance. The most important thing to bear in mind is that as claims payment costs rise so too do auto insurance premiums. So if an insurance company has to pay out more claims during a particular year, your insurer will consequently raise premiums to offset and recoup those losses.

Overall Factors

Medical expenses are one of the most pervasive costs for auto insurance companies. Every year millions of Americans are injured in automobile accidents and in each case, the associated medical bills often total in the thousands or tens-of-thousands of dollars. According to a recent report published by the Automobile Association of America (AAA), automobile accidents cost each American $1000 per year or just over $160-billion total.

While those costs may seem incredible, some experts say it could be even higher and obviously this adversely affects auto insurance premium costs.

Also, obviously affecting premiums are repairs, which are thought to cost close to $100-billion per year.

Thankfully, the cost to repair vehicles has dropped significantly since 1960; however, today there are a great many more drivers on America's roads and highways. With such an increase in numbers, the likelihood of having an accident is greater and so too is the number of accidents occurring yearly.

Court costs also play a role in premiums. For each auto accident wherein liability is argued in court, the average cost awarded is over a quarter-of-a-million dollars.

Finally, auto theft plays a major role in premium costs as well. According to the Federal Bureau of Investigation, well over 1-million cars are stolen each year at an average cost to insurance companies nearing $10,000, which translates to almost $10-billion total. Luckily, some cars are more attractive to thieves than others, a fact you can use when choosing a new car.

You can read more in our article Frequently Stolen Vehicles.

Individual Factors

Other factors that you may or may not have control over are issues such as age, driving record, and whether you have taken driver education classes.

With age comes experience and insurance companies know this, which is why the older you get, the less you'll typically pay in insurance premiums. Most policies offer reductions at age 21 or after 5 years of experience. Further reductions are also likely at age 24 or 25.

Sex also plays a role. Men are statistically more likely to have accidents so they are charged more for auto insurance. Married men receive a reduction, however, because they are perceived as being responsible to their families and thus less likely to have accidents.

Your driving record will also play a role in your auto insurance premiums. In fact, this is the one factor you have the most control over. By being a responsible driver, avoiding aggressive driving habits such as speeding, tailgating, and needless lane changes, you can minimize your chances of being ticketed and/or getting in an accident. Auto insurance companies all give some sort of safe driver discount.

Finally, if you take a driver education or defensive driving class, be sure to send your certificate of completion to your insurer. By learning to be a safe driver, you can often receive discounts. Classes like these may also help you expunge points from your record.

You can also get a discount if you're in school and you maintain a high grade point average. Insurance companies see students with high grades as being more responsible.


« back