The Ins and Outs of Risk Assessment
Fact-checked with HomeInsurance.com
The statistical models that car insurance companies use to determine our collision risks and rates are constantly evolving. In the good old days, premiums used to be based on a simple formula of a driving record, age and the make and model of the cars we drove. Now, insurers can collect far more consumer data than ever before and use this information to more precisely predict the likelihood that we’ll file an auto claim this year.
This is good news for auto insurance companies who want to limit risks and maximize profits in a very competitive market, but it isn’t good news for drivers who are considered “high-risk” due to non-driving related factors like education and income level or birth date. And while many states now regulate the factors that insurers can deem relevant to rate calculation, the only thing most drivers can do to lower their rates is to focus on the factors that they can control.
Part I: What Matters to Insurers
Armed with actuaries, statisticians, accountants and lawyers, insurance companies have identified a number of factors to determine the chances your driving will cost them money.
- Credit Rating: As weird as it sounds, a number of statistical studies have shown a strong connection between financial history and the likelihood of having an insurance loss; one which the insurer will have to pay.
- Age: Drivers aged 15-24 are responsible for 28%-30% of all motor vehicle injuries in the U.S. Within this range, the group aged 16-19 are much more reckless; three times as likely as those over age 20 to be in a fatal car wreck. In fact, motor vehicle crashes are the leading cause of death for teenagers in the U.S. As such, drivers aged 16-19 pay 50% more on average for car insurance compared with those aged 20-24. The trend continues, and as people age, their car insurance rates typically decline. By age 55, many people can even begin to enjoy senior discounts.
- Gender: Men are much more likely to be involved in fatal car crashes than women. According to data gathered by the National Highway Traffic Safety Administration (NHTSA), men were the drivers in 73% of all fatal crashes in 2007. Furthermore, statistics have repeatedly shown that male drivers, particularly young ones, are much more likely to take risks when compared with female drivers. For example, in 2011, of the approximately 765,000 people arrested in the U.S. for driving under the influence, 76% were men. These risks are borne by insurance companies, so men pay thousands more on car insurance than women over their lifetimes.
- Employment: What you do for work and where you do it can also affect your car premiums. Professionals whose jobs require paying attention to details, like pilots and scientists, often have significantly lower car insurance rates; conversely, people with high powered jobs where they work long hours and drive while tired and stressed, lawyers and doctors for instance, often have much higher rates. Similarly, people who drive a lot for work, such as real estate professionals, have higher rates, while people who work from home have lower rates.
- Driving Record: It’s easy to understand how having a lot of tickets and accidents will raise your car insurance rates; statistics show that people who violate motor vehicle laws are much more likely to 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 on their record will enjoy much lower rates.
- Vehicle Type: Cars that are more likely to be stolen, those that cost a lot to repair, and those that suffer greater damage in accidents typically have higher insurance rates than others.
- Safety Features: Cars that come with passive restraints (air bags), anti-lock brakes and stability control can result in discounted premiums because these safety features help prevent accidents and mitigate damage and injuries if they do occur.
- Place of Residence: People who live in cities and neighborhoods with higher crime pay higher insurance rates.
- Marriage Status: Statistics show that married people are safer drivers; therefore, the car insurance premiums paid by couples are typically lower than for single people.
- Amount of Coverage: Depending on where you live, and whether or not you have a loan on the vehicle, different kinds of insurance coverage may be available. And depending on your level of coverage, your rates will be higher or lower. For example, liability coverage, which only pays for damage you cause to other people’s vehicles, costs the least. Next up is collision insurance, which covers the cost to repair or replace your vehicle if you cause an accident. The highest level, comprehensive coverage, pays for damage and loss resulting from theft, weather, vandalism or fire.
- Amount of Deductible: Drivers who have a higher deductible, that is, the amount the driver has to pay to repair the vehicle before the insurance kicks in, typically pay lower car insurance premiums.
Part II: How to 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.