Auto Insurance and Risk Factors

Whenever we purchase an insurance policy, how much we pay for it depends on the probability that we will be making a claim and the extent of the claim. There are a number of factors that go into this, some we can control and some we really can’t do much about.

It’s not that insurance companies don’t like paying claims, and doing so is a fundamental part of their business, but they do want to make sure that policies are set up favorably for them so they have an overall expectation of profit from each one.

Auto Insurance and Risk FactorsRather than just offering a few policies based upon some crude distinctions, or perhaps none at all, the more refined an insurance company is in assessing and pricing risks, the more efficient the process will be. This serves to benefit both insurers and the insured, allowing risks to be priced more correctly than if such refinements were not present.

If, for instance, people who live in a certain area are more prone to accidents or vehicle theft, or damage by weather, it wouldn’t really be appropriate or fair to have people who live in other areas which are less prone to claims to pay more to make up for the added costs of those in the higher risk areas.

If insurance companies had monopolies, they wouldn’t really care about this very much, if they were the only choice for instance and people had to choose their coverages in order to obtain auto insurance. Competition is actually what drives risk-based pricing more than anything, because if you are lower risk and your company wasn’t taking this into account enough, another company may step in and offer lower rates and win their business.

It is these competitive forces that drive auto insurers toward more efficiency, although it is clearly to the benefit of these companies to analyze and price according to statistical risk. There is a huge amount of number crunching that goes on here and insurers will ask a lot of questions before they give you a quote, and base their pricing upon a multitude of factors that have statistical evidence behind them.

Risk Factors Related to Location and Type of Vehicle

When people think of how auto insurance is priced, they normally think of their driving record driving most or even all of this, but there is far more involved, and even some things that we wouldn’t think should have anything to do with auto insurance.

It only makes sense that where you live is a big factor in the rates that you will pay for auto insurance, because different locales have different rates of claims. If you live in a big city with lots of traffic and crime for instance, you can expect to pay more for auto insurance than someone who lives in a rural area with little traffic or auto theft.

Insurance companies rely on statistical data within geographical areas and use this in their calculations. We could even say that this is the starting point for rates, the base rate we could say for your area, where other factors get applied and we come up with your particular risk.

There are several major categories besides location though and another one is the type of car that you drive and its value. Location addresses the overall probability of claims and then we can drill down into what particular individuals may rack up depending on their particular circumstances.

There are plenty of statistics on individual makes and models of vehicles, with some resulting in more claims than others. The type of vehicle itself matters, as well as the type of drivers that generally drive the particular car or truck, where for instance those driving a sports car may drive more aggressively than someone driving a minivan and therefore present more of a risk.

We need not wonder why a particular vehicle is more expensive to insure, as insurance companies only need to look at the statistics for each one and price their coverages accordingly.

How much a vehicle is driven of course matters quite a bit, as the more time a vehicle is on the road, the greater the chance for a mishap. There are other distinctions that are made here such as whether the vehicle is used for work and where it is driven, and all go into assessing the risk to the insurance company, how much they may expect to pay out on average for a particular situation.

If one is seeking to obtain insurance beyond basic liability coverage, where the vehicle itself is insured against various incidents such as its being damaged or stolen, the value of the vehicle will matter a lot. The more valuable it is and the more it costs on average to fix if it gets into an accident, the greater the risk to the insurance company and the more a policy will cost.

Factors Related to the Driver

Once we’ve figured out what the risk is for a certain vehicle in a certain location driven a certain way, we also need to look at factors specific to drivers to further refine risks. Individual factors do matter a lot though, but only in combination with all the other factors present.

The most obvious factor here is one’s driving history, how long one has driven and what incidents may have happened which may affect one’s risk of a claim. Newer drivers or those with a poor driving record are going to be much riskier than those who have driven for years with no violations or claims, and it’s really all about claims here and not necessarily accidents.

Insurance companies only really care about how many times you have put in a claim for an accident or other insurable event, and this is why it is sometimes better not to make a claim if the amount of it would not be that significant, because this will likely put your rates up and you will probably end up paying back the money several times over.

Insurers do ask whether or not drivers have been in accidents that were their fault over a certain period of time in the past, although minor incidents that are settled among the parties do not have an insurance record attached to them and this is really what concerns insurers, as it indicates a greater likelihood of future claims.

Accidents that a driver is not held to be at fault doesn’t really affect things, for instance someone hitting you where you were not to blame, but some other things such as theft or damage from weather do, because they do speak to your particular risk.

Traffic violations also factor into the equation and quite a bit, because those who commit these violations are a bigger risk of ending up making claims. This is especially the case with criminal violations such as dangerous driving or impaired driving and these are treated severely.

Insurance companies generally will not insure such drivers at all, and they are forced to get insurance from secondary markets who offer much higher rates in accordance with the much higher risk that they perceive.

This is the case as well if there is a lapse in insurance, and many people are shocked to discover that if they have a period where they did not maintain auto insurance, regular insurance companies will generally not touch them and they also have to go to secondary insurers and pay several times more than normal just because of this.

It does therefore pay to maintain some sort of continuous coverage, and even maintain a minimal policy even if you are without a vehicle for a time, as a lapse could cost you a lot of money over a period of several years. It will be a long time before you get back to where you were with many years of continuous coverage should you make the big mistake of being without coverage for a period of time.

Insurance companies are now using telematics to price risk, where they install devices in your vehicle to track various things that pertain to your individual risk. This can result in a more individualized approach to your risk and reward good drivers with better rates.

Credit and Payment History

While it is never a good idea to fall behind on payments or have payments returned not paid, the tolerance level of most companies and utilities is pretty high compared to insurance companies.

Perhaps the most important thing to know with auto insurance is the absolute importance of keeping these incidents to an absolute minimum and preferably never letting this happen because the consequences of this with your auto insurance policy are severe.

If you miss more than one payment on your policy, not only can your insurance company terminate your coverage, you may not be able to purchase normal coverage anywhere as a result of this. People who make this mistake can have themselves paying several times more for insurance for years.

Regardless of whether or not insurance companies treat this too extremely, the fact that they do makes this something we always need to pay close attention to. We always need to be aware of how many times we can have a payment returned and make very sure we do not exceed this, and often times you only get one chance and the second time is one too many.

Aside from this, a great many people don’t realize how much one’s credit score affects what they will pay for auto insurance and any sort of property insurance in fact. While we may wonder what one’s credit score has to do with auto insurance risk, insurance companies have statistics on this and it is believed that credit score is the biggest factor in determining rates, even more so than one’s driving history.

In fact, a driver with a poor driving record but great credit will pay more generally than one with a great driving record but a poor credit history. Insurance companies compile insurance scores and credit score is the single most important factor in this score, believe it or not.

It is true that those with poor credit often, but not always, demonstrate a lower standard of care with their credit, and this seems to have a pretty strong correlation to the standard of care they may exercise with other things, such as driving or vehicle maintenance. If one’s credit is poor for instance, they may not keep their vehicles in proper condition and be more at risk.

In any case, this is treated as a pretty big deal by insurers so we need to heed this accordingly. Bad credit is not a pleasant thing, and often time even our best efforts cannot prevent this, but this is another reason why we need to do our best with establishing and maintaining good credit.

There are a lot of things that go into how much you will pay for a particular coverage with auto insurance, and prices do differ quite a bit among insurers, so it does pay a lot to make sure that you are not only controlling what you can control but shopping around as well.

John Miller


John’s sensible advice on all matters related to personal finance will have you examining your own life and tweaking it to achieve your financial goals better.

Contact John: [email protected]

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