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The ins and outs of risk assessment

Fact-checked with HomeInsurance.com

The statistical models car insurance companies use to determine collision risks and rates constantly evolve. In the good old days, insurance risk assessment involved a simple formula based on driving record, age and the vehicle make and model. Now, insurers collect far more consumer data than ever before and use this information to more precisely predict whether we will file an auto claim this year.

This is good news for auto insurance companies that want to limit risks and maximize profits. Not so much for drivers considered “high-risk” due to non-driving related factors. 

Insurance companies assess risk based on things like education, income level and date of birth. And while many states now regulate the scope of relevant factors allowed in how insurers determine their premiums, most drivers affect the insurance risk analysis profile mostly by focusing on those elements under their control.

What is risk assessment?

An insurance risk assessment is the process by which an insurance company determines your premium amount by determining the likelihood that you will file a claim against your insurance. Insurance risk analysis weighs key indicators about policyholders against big data algorithms as determined by actuaries, statisticians, underwriters and lawyers. The goal, of course, is to strike a balance between an insurer’s profitability and potential claims by policyholders. By using tools such as Moody’s Risk Analysis, insurers calculate the bottom-line numbers to determine auto insurance premiums.

Who is impacted by risk assessment?

Risk analysis experts define data sets to assess risk related to specific policyholder subsegments. Based on subsegments like men under age 25, marital status and occupation, big data slices and dices policyholder demographics to quantify traits and characteristics that influence policy premiums. 

In other words, insurers apply risk assessment analysis to all policyholders. As qualities and behaviors that increase risk factor into the coverage equation, premiums likewise increase. 

How do insurers assess risk?

As published in the Auto Insurance Guide, an array of factors impact car insurance premiums. The type, level and terms of the coverage provided in a policy plays a part in the risk assessment. Other elements in the assessment include policyholders’ driving records, credit rating and age. Taken in combination, insurers use these factors to determine premiums. 

Credit Rating: Similar to credit scores, according to the Insurance Information Institute, insurers establish policyholders’ insurance scores as part of the risk assessment calculation. Taken together, information from credit reporting agencies—outstanding debt, bankruptcies, length of credit history, collections, new applications for credit, number of credit accounts in use and timeliness of debt repayment—offer insurers insight into how well policyholders manage their money. Effective money managers typically represent fewer losses for insurers and give those with a good credit rating a better rate.

Age: Generally speaking accidents involve less experienced drivers more often than they involve drivers with years of sitting behind the wheel. Mature driving characteristics include courtesy and adherence to speed limits and the rules of the road. Senior drivers also often log fewer vehicle miles. 

At the same time, especially young drivers represent high-risk. 8 percent of drivers involved in fatal crashes in 2017 fell between the ages of 15 and 20. The figure takes on particular significance considering these young drivers represent only 5.4 percent of total drivers in the United States, according to III. 

Other over-represented risky behaviors exhibited in the age group include drinking and driving and lack of seatbelt use. 

Gender: Statistically speaking, more frequent and more serious accidents involve male drivers than female drivers. Additionally, alcohol-related accidents more often involve men than women. For these reasons, men pay thousands of dollars more over their lifetime for auto insurance than women.

Location: Cities represent higher rates of vandalism, theft and accidents compared to policyholders who live  and work in small towns or rural areas. Whether you’re parking on the street or in a secure garage also plays into premium rates

Commuting: The more miles drivers put on their cars, the more chance for accidents. With only occasional use of a vehicle, policyholders often receive so-called pleasure-use rates and pay lower rates.

Driving Record: Understandably, multiple tickets and accidents raise car insurance rates. Statistics show the same drivers who break motor vehicle laws also cause accidents. As such, these reckless drivers will pay significantly more for car insurance. On the other hand, safe drivers with no tickets or accidents enjoy much lower rates.

Vehicle Type: Desirable cars in the eyes of thieves trigger higher premiums. Ditto for those that cost a lot to repair and that suffer greater damage in accidents.

Safety Features: Cars that come with passive restraints (air bags), anti-lock brakes and stability control can result in discounted premiums. These safety features mitigate and prevent accidents.

Marriage Status: Insurers provide better rates for married drivers than single drivers, attributable to safety statistics.

Coverage: Policyholders choose the level of coverage on their vehicles. Comprehensive, collision and liability insurance, respectively, represents the greatest amount of coverage to the least amount of coverage available. Whether the bank owns the note on the vehicle affects minimum requirements. Coverage for damage due to an accident or coverage for damage resulting from inclement weather or vandalism varies with the coverage level and corresponds with a higher or lower premium. 

Deductible: The amount the policyholder pays on the front end of a claim before insurance kicks in affects whether insurers require a higher or lower premium. The more skin in the game on the part of the policyholder, the more the premium drops proportionately. 

How can you lower your rates?

There are several ways drivers can lower their rates:

  • Change Cars: If you have one of the most frequently stolen cars, or one that costs a lot to repair, replace it with one that is cheaper to insure. Likewise, if you are buying a new car, choose one with safety features that provide a premium discount.
  • Change Policies: Rather than pay for the maximum amount for coverage, choose the minimum. Add a higher deductible to enjoy lower rates, as well. In fact, people who drive very little may benefit by choosing a Pay-As-You-Drive (PAYD) policy that charges them only for the miles they travel.
  • Talk to Your Agent: There are probably some discounts you qualify for, but don’t know about. Are you a good student? Do you have a good driving record? Are you married? Do you have a career that requires attention to detail? Does your vehicle have safety features? These and other factors can lower your rate, so be sure to check with your agent.
  • Fix Your Driving Record: In many states, tickets can be “fixed.” Consult an attorney to see if you can have some of your past indiscretions dropped from your record.
  • Pay on Time: Hand-in-glove with credit history, drivers who pay their insurance premiums on time often pay lower rates.
  • Ultimately, the best strategy for lowering your rates is to improve your risk profile. Plan on this being a long-term operation, as there are no quick fixes. The surest way to show your insurance provider that you are not a risk is to take fewer, and become a safer driver.

The takeaway

  • Insurers perform risk analysis to provide an element of safety to policyholders weighed against company profitability. 
  • Risk analysis takes into account a multitude of factors in assessing policyholder risks against insurer liability. Policyholders control some but not all aspects of the risk assessment.

Assessment of insurance risk includes things like education, income level and birth date. And while many states now regulate the relevant factors available for insurers to use in determining as relevant in rate calculations, most drivers lower their rates by focusing on those factors under their control.

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