Car insurance provides a way for you to protect your investment, but many people don’t fully understand how auto insurance works. For starters, a variety of factors go into determining how much you will pay per year for your auto insurance. Called underwriting, this process involves specially trained agents who determine the amount of risk you represent. They then come up with a cost, in the form of the premium you pay, to make it worth the insurance company’s investment in protecting your car.
Knowing what to look for when shopping for the most cost-effective insurance helps you stay within budget. But how do car insurance companies determine the amount of your premium through underwriting? And what can you do to keep your premium down?
If you want to learn all about auto insurance, here are the three essential considerations you need to know about car insurance companies and the underwriting process.
1. Underwriting and Car Insurance Risk Assessment
Whereas an insurance agent sells you the coverage plan to insure your car, an underwriter determines the risks involved, how best to provide coverage, and whether the car insurance company should even take the risk in the first place. As a part of their duties, an underwriter performs the following:
- Reviews information to assess the risk involved
- Decides the type of policy coverage needed and what exactly that coverage insures
- Changes coverage to add, delete, or alter the scope of the original policy
- Finds ways to eliminate or reduce future insurance claims
- Works out any potential problems with the agent or broker to provide coverage
A complex process to say the least, underwriters receive training in risk assessment and determining how best to minimize risk. They use this knowledge to determine how much coverage for your vehicle costs and if the insurance company should accept the risk involved.
2. Underwriting Is Complex and Assesses Many Factors
An underwriter usually looks at a particular policy if the situation seems outside of the norm. For example, if you have a lot of traffic violations or accidents on your driving record, an insurance company would first need to have the underwriting department determine if you were worth the risk of insuring and at what price.
Learning all about auto insurance includes understanding the following common criteria used in the underwriting process:
- Address: Where you live plays a part in how much your premiums cost. Living in an area that sees more theft, vandalism, and accidents requires you to pay more.
- Age: Younger drivers tend to have more accidents and thus must pay more for car insurance. Most often, younger drivers pay higher premiums until the age of 25, or longer if they have accidents on their driving record.
- Credit history: If you have bad credit, you probably pay more for car insurance. A Federal Trade Commission (FTC) report supports this mindset and shows that policyholders with lower credit scores tend to file more claims with insurers.
- Driving record: Your driving record is a snapshot of your risk as a driver. Drivers with a history of accidents and traffic violations on their record show that they take risks when driving. Even worse, DUIs represent an even greater risk because they involve impaired driving. Drivers with a good driving record represent a smaller risk and thus pay lower premiums.
- Gender: Driving statistics from the Insurance Institute for Highway Safety show that men tend to drive more miles and take more risks while driving compared to women. The result: Higher insurance premiums for male drivers over similarly aged female drivers.
- Marital status: Married people, especially those with children, take fewer risks while driving. Single drivers, on the other hand, take more risks, leading to higher premiums. Underwriters also look at married couples as more financially stable, another contributing factor to the overall cost of car insurance premiums.
- Prior coverage: Driving without insurance coverage can result in higher insurance premiums in the future. Underwriters take this into account and place such drivers into a high-risk category.
3. Car Insurance Premiums Go Down Over Time
Barring unforeseen events, such as accidents or traffic violations, car insurance premiums go down over time. As you age, underwriters see you as less of a risk, as more mature drivers tend to take fewer chances while driving, including remaining at or below the posted speed limit while driving, observing all posted road signs, and maintaining a more defensive-minded mentality while driving.
Other factors that cause your car insurance premiums to go down include:
- Bundling: Bundling your car insurance with your home or renters insurance gains you discounts on both. This also includes other insurance types, such as for a boat, motorcycle, or life insurance policy. While the amount you pay might go up, if you bundle your house insurance and other car insurance policies together as you acquire them, you should pay an overall lower premium amount for each.
- Safe driving record: Maintaining a safe driving record assures underwriters that you represent a healthy risk and could cause them to lower your car insurance premiums over time.
- Loyalty discounts: Many insurance companies give loyalty discounts to customers who stay with them for the long haul. Some car insurance companies use a practice called price optimization, where the company raises your premiums because they bank on you staying with them due to your loyalty, so watch out for this.