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How Does Your Auto Insurance Carrier Determine Your Rate?

How Does Your Auto Insurance Carrier Determine Your Rate?

Good Morning All:

I hope you are enjoying your transition into the summer. It would be nice if the weather would start to cooperate.

I wanted to take a moment to write about the latest things that auto insurance carriers are doing to determine all of our rates. I’ll start with all of the obvious things and then transition into some of the more obscure things that we probably don’t think about, but still need to know.

Here are some things that have been drilled into our heads over the years as things that affect insurance rates. There are some general rules of thumb which we’ve talked about over time, such as multi-vehicle discounts, multi-policy discounts, good student discounts, etc. However, we’re going to focus more on the nuts and bolts of the rating process and what they look at, while keeping in mind that generally, multi-cars and home/auto discounts will always help the rates.

The Obvious:

  1. Driving Record – Tickets and accidents affect rates.
  2. Age of Operator – Younger drivers cost more money (sometimes 200-300% depending on circumstances).
  3. Zip Code – Rates are based on where your vehicle is garaged. Generally, more populated areas create higher rates. For a majority of our clients, the difference between Waukesha County, Milwaukee County, and the City of Milwaukee can be significant.
  4. Mileage – How far you drive to work and your annual mileage are taken into account.
  5. Credit Score – Most carriers have been using some form of credit scoring for the better part of 15 years. We do have a few carriers who do not use credit, but for the most part, credit has become another tool that carriers use. The results have shown consistently that higher credit scores result in lower claim frequency. As long as that is true, insurance companies will continue to use this to determine rates.

Here’s what we want to focus on today: some of the newer things that carriers are using. Most of these are not used by all of our carriers, but I would say that a majority of them use many of these. With technology increasing at a rapid rate, insurance carriers have more sophisticated tools than ever before to determine rates. If you speak to 10 different agents, you might get 10 different answers on whether some of it makes any sense, but the fact is if an insurance carrier can use a segment of data to better predict the likelihood of a claim, they will use it in their rating.

The New:

  1. Not-at-Fault Accidents – Some will make a charge for an accident even if it’s not your fault. There are many opinions on this topic, but our general advice to our clients is to be aware of this situation. It may be to your advantage to run a loss through someone else’s insurance. Even though it may be more cumbersome in the process, it can keep the not-at-fault accident off your claim history in some cases.
  2. Payment History – Some carriers have determined/believe that insureds with a repeated lapse history over time are a higher risk. One suggestion to prevent this is to put your policy on some sort of automatic payment or pay fewer times per year. Many carriers give significant discounts if you pay the premiums in full.
  3. Telematics – Carriers will give discounts to drivers who agree to allow them to monitor their driving habits. Most commonly this is done with a device that plugs into your vehicle or a smart phone app. They will measure things like rapid acceleration, rapid braking, speed, and the time of day that the vehicle is driven to determine impact on rates. As you can imagine, the discount for the monitoring device is moved up and down once the insurance carriers have enough information to determine your risk. There are occasions where they charge you more because of habits which increase risk.
  4. Vehicle History Scoring – Carriers will take into account the age and model of a vehicle, safety features, vehicle accident history, and other factors related to that model of car. Those who use this believe that enough information exists to determine the likelihood that a particular vehicle will be involved in an accident, as well as the severity of the accident. Carrier logic is all over the place on this one. Some give a new car discount while others believe that a car new to you could increase risk because the driver is not as familiar with the vehicle. All of this is reasonable new technology, and the end results remain to be seen.

When I started in 1992, we looked at age and driving record, went to a 500 page manual, and went through charts by hand to determine rates for clients. The typical carrier would have Premier, Preferred, and Standard rates (3 tiers). With all of the technology at their disposal, I would suspect some carriers now have over 2,000 price points. We hope in the long run that it will allow them to charge a more competitive rate to a wider segment of insureds. It does make our job challenging, as we do not have access to many of these variables to tell clients specifically why the rates change. Our best defense is to educate clients on what goes into the rating so we can help keep rates as low as possible.

Thanks again for allowing us to protect your families. As always, if you have questions on any of this, please give your agent a call.


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