Everyone knows that auto insurance is a necessary prerequisite in order to drive. It has become a facet of everyday life, albeit often a rather expensive one. But why are some individual’s premiums higher than others? We break down why some people pay more and other facts you should know when shopping for car insurance.
During a process called underwriting, auto insurance companies use many different criteria to evaluate an insurance application. Each company has differing guidelines regarding which group of drivers they want to accept and how much they will charge those who they consider to be a greater risk, so it is very possible for two companies comparing the same driver to offer vastly different premiums. At the end of the underwriting process, the applicants are placed in groups based on how many claims the insurance company believes they will file. Drivers who they believe to be the lowest risk (who will file the lowest amount of claims) will be offered the cheapest rates, as theoretically they will be the least expensive to insure.
The most important piece of information any car insurance company will look at is the driver’s motor vehicle record, which will show how many tickets they have received and how many accidents they have been in. Many companies also use an insurance history report to see if the driver has made any past insurance claims, and how much money was paid if so. It’s important to note that while accidents and violations can only affect the rates you receive for three years, companies often look back five or more years when deciding if they want to offer insurance to a new customer.
Luxury car owners
Apart from a driver’s actual record, there are several other factors that companies will consider when determining an applicant’s risk level. The car being driven largely affects what the insurance rates will be. If the car is expensive to repair, then the company will have to pay more if the driver gets in an accident. Conversely, if the car is extremely safe and protects its occupants well, the company will not have to pay as much. Around 95 percent of insurers – according to FICO – also check the driver’s credit history. Research from The University of Texas and the Federal Trade Commission found credit scores to be effective predictors of risk in drivers, with those with higher than average credit scores filing significantly less claims.
Young, single people
Other factors can include age, sex and marital status. On average, an insurance company will view a 35-year old married woman as a significantly lesser risk than a 20-year old single man. Driving experience is one obvious reason for this, but there are many other factors companies consider as well. Assumptions are often made that younger, single people tend to live with roommates (who often borrow cars) and live more reckless lifestyles than their married counterparts.
But remember, an individual’s driving record is always the most important factor when determining rates, and every company uses different criteria. Always shop around and compare when shopping for car insurance.
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