Auto Rates!

Posted: Fri Jun 22, 2007 10:59 am Post Subject:

Hi Arindam,

I want to thank you for this question. Many times we can not understand what factors are affecting our premium rate and keep wondering about it. Insurance companies determine your auto insurance premium rate on the basis of your age, sex, marital status, driving history etc. The make-and-build of the car also affects the premium rate. Hope this information will help you in understanding it in a better way. Thanks

Posted: Fri Jun 22, 2007 11:28 am Post Subject:

Many times we can not understand what factors are affecting our premium rate and keep wondering about it

Posted: Sat Jun 23, 2007 08:39 am Post Subject:

The factors that influence the auto policy are:
Type of car
Driving preferences
Driving record
Age, gender and the experience of the driver
Credit Based insurance score.

Posted: Sat Jun 23, 2007 08:40 am Post Subject:

Your auto insurance premium rate depends on the state where you live, the type of car you drive and the mileage you drive everyday.

Posted: Sat Jun 23, 2007 08:41 am Post Subject:

Apart from these the car rate insurance may vary when buying direct or from an agent. When you buy from an agent it includes the commission paid to the agent and if you buy from progressive, the rate reflects the cost of building, staffing and marketing cost.

Posted: Sun Jun 24, 2007 11:01 pm Post Subject:

Don't get me started on carriers rate being based on some one's credit score. That should be made illegal. A lower credit score simply means someone is more likely to take advantage of the insurance agreement and file a claim. It's not necessarily a sign that a person is a higher _risk_.

Posted: Fri Jun 29, 2007 12:32 pm Post Subject:

Yes, but you just said it best yourself, tcope. They are more likely to take advantage of the insurance agreement and file a claim. Therefore they are more likely to cost the insurance company more money, and more money being paid out for an insurance company means a higher risk...of losing money.

Insurance companies only stay in business because they constantly balance premiums in versus claims paid out. So, a higher likelihood of having to pay out means they need to collect more premium from the person that will be more expensive to insure, which statistically are people with lower credit scores.

Whether right or wrong, there is a lot of validity to the companies line of thinking that way.

Posted: Fri Jun 29, 2007 02:11 pm Post Subject:

Actually it's not a _valid_ reason as it is not related to insurance. A premium should be related to the _risk_, not the _possibility_ that someone will actually hold the insurance company to their promise to pay what they owe. Think about that... the insurance company charges a higher premium just because it's been shown that a group of people are more likely to use their policy when they suffer a risk. Again, this has nothing to do with exposure or risk. Now, I agree 100% that it means the carrier might pay out more on those policies then others. So I can see the carriers point of view. But again, the likelihood that a person will actually hold the carrier responsible for what they promised to do is not related to risk or exposure so it should not be allowed to adjust a premium. That is why I say it should be made illegal. Adjust a premium all you want based on risk and exposure, just not on the likelihood that a certain group of people will actually hold you accountable for your promise to pay.

Insurance company: "So if you have a legitimate loss, you will actually _file_ a claim and hold us accountable for what we promised to pay?"

Customer: "Yes"

Insurance Company: "Alright, then we charge 10% more."

Posted: Fri Jun 29, 2007 03:28 pm Post Subject:

I guess I just look at it differently. I think, though, you said it best...

"Think about that... the insurance company charges a higher premium just because it's been shown that a group of people are more likely to use their policy when they suffer a risk"

That is exactly right, insurance companies rate people based on groups they fit in based on the exposure to paying out for certain risks. So, youthful operators pay more because insurance companies pay out more often. On that same note, "credit challenged" drivers pay more because insurance companies pay out more often.

I just see it as a see-saw, the company has to keep the balance between money in and money out while still maintaining profitability. So, if bad credit means they will pay out more, it doesn't matter if it is bad credit or youth, there is still more exposure to money out the door. It's not the exposure to risk, it's the exposue to pay out.

And in your hypothetical scenario I don't think you're looking at this large-scale if you DON'T think that is how they do it. What's the difference between rating based on your ficticous dialogue versus rating based on claims history. Again, "If you are going to hold us liable to pay then we'll charge you 10% more" can be translated to "If you're going to cost us more money than we'll have to charge you more" which could also be translated to "Because you have at-fault accidents shwoing on your record than we'll have to chrge you more."

It's all the same, more money out means more money in, or in a more practical sense, more RISK of money out means more NEED for money in. But I don't necessarily disagree with you, but I do feel it is fair for companies to keep using their current scoring system.

Posted: Fri Jun 29, 2007 05:27 pm Post Subject:

Almost all of what you said is correct and I don't disagree that a carrier may pay more to people with bad credit but what is still incorrect is your statement that the _risk_ or _exposure_ is greater for people with lower credit scores. It's clearly not the case. This is the center point of the entire issue.

Credit ratings are a _good_ indication of a person's _financial_ situation... not their _risk_ to an insurance company.

Allow me to give an example:

I lose my job and cannot afford to pay my bills. Therefore my credit rating drops. I finally get a job and buy a car. Now I need auto insurance. Am I more likely to cause an accident because of my prior financial issues? Of course not, that is just stupid. But it's _true_ that people with lower credit scores are more likely to _file claims_. Why? Well, you also need to look at the other end... people with good credit are mostly going to be financially well off. If they have a $500 deductible and suffer a $1000 loss, they probably won't file a claim as their rates may increase and they can afford to just pay the $1000 out of pocket and save money in the long run. They also live in better areas, where crime may not affect them as much. The list goes on. So, people who are not financially as well off are _more likely to take advantage of the insurance policy that they are paying for_. While this _will_ cause to the insurance company to pay more in claims for these people, it's unethical (and should therefor be illegal) to increase premiums based on someones past financial standing. Should the police also target minorities because statistics show that they are more likely to commit crimes? Nope. Want to know why? Because it's illegal. But facts could show that this would reduce crimes. But being Latino, Black, Asia, etc. does not mean you are predisposed to commit crimes. The same is true of credit ratings and exposure/risk.

Note: I'm hoping everyone will see that I'm trying to make a point and am not trying to offend anyone.