How do insurance companies figure out how much I should pay for auto insurance?
Although methods of determining premium charges are different from company to company and by coverage, the following section describes how your policy is generally rated.
It helps to understand how an automobile insurer determines your premium charges. This will make you more aware of the cost of some coverage options and the impact that discounts have on your final premium.
The base rate for a specific coverage and territory is taken from the insurer’s rate manual. The base rate is justified by an insurer in a rate filing sent to the State Department of Banking and Insurance based mostly upon the insurer’s past premium, accident, loss and expense statistics.
The State Department of Banking and Insurance regulates the rates that automobile insurers can charge. Rates cannot be excessive so that an insurer can earn unreasonable profits. Conversely, rates cannot be inadequate, which means an insurer must have enough money to pay claims and cover expenses.
The base rate may be multiplied by an increased limits factor. If you want a higher limit of protection than is mandated by State law, an increased limits factor would apply. Benefit from cheap car insurance from the leading car insurance companies.
The base rate is then multiplied by a classification (or class) factor. The class factor considers age, sex, marital status, distance driven to work or school, driver training and good student discounts. Classifications that statistically have a higher propensity for accidents result in higher class factors
being assigned.
The base rate is then multiplied by any applicable discounts; for example, a discount for an air-bag, anti-theft devices, or other safety devices. This is done because safety features tend to reduce both the number of accidents (claims frequency) and/or the amount paid out in accidents (claims severity).
Not all discounts apply to all coverages. For example, an anti-theft device may make it less likely that your car would be stolen. Therefore, you receive a discount on your “comprehensive” coverage premium. You would not receive a discount for an anti-theft device on your “combined single limit” premium since the anti-theft device doesn’t reduce the chances of you’re injuring someone else in an accident or lessen the degree of an injury if it were to occur.
A Tier Rating Factor is then applied. This factor, which is a 1.00 if you are rated at the standard tier level, is meant to reflect such risk characteristics as driving record, past at-fault accidents or other characteristics that are statistically proven to be related to a driver’s probability of being involved in a future claim. For example, statistics show that drivers with at-fault accidents in the recent past are much more likely to have another at-fault accident in the near future than drivers with no at-fault accidents in the recent past.
Drivers that are inexperienced tend to cause more claim payments than drivers that have more driving experience.
An expense fee is then added to the resulting premium after the multiplication steps are completed. This is because there are expenses associated with policy issuance that do not vary by territory or classification.
