Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
When you consider insurance as “shared risk pool,” the answer to this question comes into sharper focus. If there are two drivers in the same city with the same driving record driving automobiles that are both the same year make and model, who should pay more for their policy, the driver who will commute 30 miles day to work or the one who uses the car sparingly on weekends? Mileage makes a difference. Every mile is a unit of exposure that makes one riskier than another.
If one of our drivers trades in their sedan for a high powered, low weight sports car and the other driver is still driving the low powered four door sedan he had in the first example, who should pay more? Assuming the same mileage, the high powered sports car presents two problems to the shared risk pool. The first problem is that with that power and low weight the driver is more apt to engage in aggressive and perhaps dangerous driving. The second is that the body of that low weight sports car is probably more expensive to repair. The anticipated use of the vehicle and the cost of repair are two items which shift the expense that the risk pool will experience.
Now suppose that the first driver, the one with the sedan is 16 years old while the driver of the high powered sports car is 55. Experience plays a major role and might reverse the experience making the sedan the riskier car to insure. Experience is very important in rating an automobile risk.
Now suppose that this first driver also has a recent citation for driving under the influence of alcohol. The older driver has a spotless driving record. Certain violations are deemed more dangerous than others and a DUI is considered the worst. This blemish will follow this young driver for ten years in California and the price of insuring that driver will increase a great deal. DUI, and racing are two violations that have a tremendous impact on the cost that the risk presents.
Now suppose that our older, more stable driver takes a job delivering pizzas for a neighborhood pizzeria. The driver now presents an entirely different type of risk because he is now doing commercial driving. The risk he presents is increased a great deal because he will not be as focused on driving as he will be looking for addresses and worrying that the pizzas might be getting cold.
As you can see most drivers are unwilling to pay the same amount for insurance that a driver that is inexperienced, or driving an expensive fast car, or driving excessively, or using the car for commercial purposes or has a record of DUI. They want to share the expense of insurance with like drivers and that is exactly how the insurance company operates. The insurance company issues rates for “standard” drivers and then alters the rates to take into account the variations that exist. These rates and variations are based upon the companies experience with thousands of accidents. The assignment of rates is not a perfect science but it is as close as possible to reality. The amount an insurer charges for a risk is what they think it will cost them to include that car into their risk pool.
Insurance companies are not designed to gouge the public. They are required by law to remain solvent so that they can pay claims and meet their promises. The price an individual driver pays needs to be considered from the perspective of all the other drivers who the company insures.
That is an excellent question! There are many factors that contribute to how the companies set their premium prices. The first thing to know is that insurers are all about the risk. The more risk that they will have to pay out, the higher your premium payment will be. Why? because they don't want to collect a couple of payments from you, and get stuck paying out a large sum. So your driving record will be the first thing. Your age and gender will be a factor. Young male drivers are higher risks than middle-aged mom's, for example, so the young man will likely pay higher premiums than Mom will. What you are driving also plays a part, a sports car or expensive to repair vehicle will cost more than a gently used family car would. A new vehicle verses an older one, for the same reasons. Then there are things like your credit history, and where you live; and the companies profit margin to consider. There can be more, but these are the big ones that you can count on as factors. I hope that answers your question, thank you for asking!
President, Insurance Associates Agency Inc., West Chester, OH
The answer is rather simple on the surface. The state you live in, the rating territory, the type of vehicle including year, make and model, the number of miles driven to and from work one way, the annual miles you drive, the age of the driver, the marital status of the driver, the driving history of the predominate driver (and other drivers in the household), and the overall success of your insurance carrier at underwriting for a profit in you territory or state. Don't overlook the influence of the required coverage for your state. There are so many influencers but this hits the high points in brief.
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If one of our drivers trades in their sedan for a high powered, low weight sports car and the other driver is still driving the low powered four door sedan he had in the first example, who should pay more? Assuming the same mileage, the high powered sports car presents two problems to the shared risk pool. The first problem is that with that power and low weight the driver is more apt to engage in aggressive and perhaps dangerous driving. The second is that the body of that low weight sports car is probably more expensive to repair. The anticipated use of the vehicle and the cost of repair are two items which shift the expense that the risk pool will experience.
Now suppose that the first driver, the one with the sedan is 16 years old while the driver of the high powered sports car is 55. Experience plays a major role and might reverse the experience making the sedan the riskier car to insure. Experience is very important in rating an automobile risk.
Now suppose that this first driver also has a recent citation for driving under the influence of alcohol. The older driver has a spotless driving record. Certain violations are deemed more dangerous than others and a DUI is considered the worst. This blemish will follow this young driver for ten years in California and the price of insuring that driver will increase a great deal. DUI, and racing are two violations that have a tremendous impact on the cost that the risk presents.
Now suppose that our older, more stable driver takes a job delivering pizzas for a neighborhood pizzeria. The driver now presents an entirely different type of risk because he is now doing commercial driving. The risk he presents is increased a great deal because he will not be as focused on driving as he will be looking for addresses and worrying that the pizzas might be getting cold.
As you can see most drivers are unwilling to pay the same amount for insurance that a driver that is inexperienced, or driving an expensive fast car, or driving excessively, or using the car for commercial purposes or has a record of DUI. They want to share the expense of insurance with like drivers and that is exactly how the insurance company operates. The insurance company issues rates for “standard” drivers and then alters the rates to take into account the variations that exist. These rates and variations are based upon the companies experience with thousands of accidents. The assignment of rates is not a perfect science but it is as close as possible to reality. The amount an insurer charges for a risk is what they think it will cost them to include that car into their risk pool.
Insurance companies are not designed to gouge the public. They are required by law to remain solvent so that they can pay claims and meet their promises. The price an individual driver pays needs to be considered from the perspective of all the other drivers who the company insures.