Most people know that having a car accident can affect the price of their auto insurance. However, insurance companies use many factors to determine what they charge, and some of those factors may surprise you. Knowing what determines your premium could help you save money.
Auto insurance premiums are determined by two factors: underwriting and rates. Underwriters use statistical analysis to determine the likelihood and cost of claims within broad classes of people — for instance, men 18-24 years old. Then the insurance company calculates what insurance rate it needs to charge each of those classes.
“Claims frequency” is the single biggest factor insurers consider in setting rates. This number reflects how often claims occur within a group of people, such as those men 18-24. Insurers use it to determine how much they need to charge to pay all of the claims they can expect. Young men pay higher rates than mature men because they are more likely, as a group, to have accidents. Several other factors determine the ultimate rate you will pay for your auto policy:
- Annual mileage: More miles lead to more claims.
- Driving record: Drivers with previous accidents or moving violations pay higher rates.
- Geography: Urban areas have more claims.
- Gender: Men have more accidents.
- Age: The youngest and oldest drivers have more accidents.
- Marital status: Married people have fewer claims.
- Prior insurance cancellation: Previously failing to pay premiums affects current rates.
- Vehicle make and model: Sports cars average more claims.
Get a CLUE Report
If you have had an accident, you can’t hide that fact from your insurer. Insurance companies feed their claims data into a central database, called CLUE, that each insurer accesses to determine auto rates for new and renewal policies. Your claims history stays in the database for seven years.
Consumers can receive one free copy of their CLUE report each year. If you find any inaccuracies, you can dispute them. Go to http://www.choicetrust.com to learn more.
The kind of car you drive also affects your premium. Cars that are more likely to be stolen, such as the Cadillac Escalade, cost more to insure.
Insurance companies may use credit scores to determine insurance rates. Insurers have found a direct correlation between high credit scores and low insurance claims.
The use of credit scores is controversial, especially since no one seems to know exactly why the correlation exists. Consumer watchdogs have criticized the practice and some states have passed laws that limit or restrict the use of credit scores in determining insurance rates. Nonetheless, in 2007 the Federal Trade Commission validated the use of credit scores as a legitimate underwriting tool.
How to save money on your premiums
In addition to driving safely, there are several things you can do to save money on your auto insurance.
Traffic school: If you have a traffic violation, take advantage of traffic school, which in many states allows you to erase your violation from your driving record. Deductible: Raising your deductible will lower your premium.
Collision insurance: If your car is several years old and showing its age, decide whether you need to carry collision insurance, which covers the cost to repair your car if you are at fault in an accident. Consider the tradeoffs between your car’s value, your deductible and the additional annual cost of collision insurance.
College students: If you have children who are away at college (i.e., 100 miles from home), you may be eligible for a reduced rate on your insurance.
Credit score: Improve your credit score by paying bills on time, paying down balances and not applying for unnecessary credit cards.
- How Your Credit Score Affects Insurance Costs
- Why You Need Uninsured and Underinsured Motorist Insurance
- Auto Insurance: How to Know What You’re Buying
- Nine Ways to Save on Homeowners Insurance
Auto Insurance Goes Green
If your auto insurance cost were tied directly to how many miles you drive, would you drive less?
The Brookings Institute and various government agencies have concluded that if consumers paid for auto insurance based on their mileage, the country would see an eight percent decline in miles driven, cutting carbon emissions by two percent and oil consumption by four percent.
Currently, low-mileage drivers receive only a minimal reduction in their auto rates, despite the fact that claims costs are directly related to the number of miles driven. Under a new system of pay-as-you-drive (PAYD), mileage would become a significantly more important component of the total rate each driver pays.
Mileage could be verified through either an onboard electronic device, such as OnStar, or by verification of odometer readings. One insurance company proposes to let customers “buy” a certain number of miles each year and then verify the mileage only if they file a claim. Several other companies are looking at ways to implement PAYD.
At least one skeptical insurance executive doubts that PAYD will work. “People who don’t drive much will sign up for it, reducing the total pool of premiums available to pay claims,” the executive said. “The companies will have to raise rates for other drivers, losing any competitive edge they may have with mainstream customers.”
Whether or not PAYD pans out, it pays to see if your actual mileage driven lines up with your policy.
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