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UPDATED: Mar 13, 2020
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Most consumers know that car insurance can be pricey but do not actually know what factors affect how much drivers pay. If you have been comparing your rates to the rates of the people you love, it is only natural to wonder why you pay so much more than your brother even when he has a horrible reputation for driving recklessly.
There will be a long list of reasons why your premiums are higher or lower than the premiums that your friends or family pay. What consumers need to know is that they do not have to have a history of accidents or blemishes on their driving record just to be charged expensive premiums.
If you would like to know what makes car insurance expensive, you need to learn about the marketplace and ultimately about risk. Virtually everyone wants to learn how to reduce their premiums, but most people resort to lowering their coverages to reduce how much they pay.
Instead of putting you and your family at-risk of having losses that are not covered, set aside time to educate yourself. By learning why car insurance can get so expensive, you will learn what you can do and what you cannot do to find the most affordable rates.
Read this guide to car insurance rates and what raises them so that you are prepared to shop for coverage. Be sure to use the FREE comparison tool above to start your search now!
How Does the Auto Insurance Marketplace Work?
Most people know the basics when it comes to insurance. As a consumer, you can shop for coverage from one of many insurers.
You select the coverage that you want, the insurer gives you a rate, and you pay that rate for the term for the protection that you select. If you have an accident, the insurer pays the claim up to the limits on your policy.
If you do not have a loss, the insurer keeps the money that you paid. While this is what most people are familiar with, there is much more to the industry than you might know and this involves setting rates.
Filing Rates With the Department of Insurance
Insurance companies do not just throw out a ballpark figure when giving you an insurance rate quote.
Each company has their own rates and each state has their own set of rules regarding rates. The rates that a company files with their state’s Department of Insurance have been thoroughly researched.
The company does their homework to assess risks, comes up with very complex formulas to assign premiums costs to different risk factors, and then justifies why they need to collect a specified amount of premiums for these factors to the Department that approves rates.
Justifying the Rates With the Department
Any rates charged by an insurer must first be approved by the Department of Insurance ensure they are not predatory or exorbitant in any way. As long as the Department finds that the rates are fair based on the risk the driver presents, the company will be given the okay to set these rates in the future.
To justify the costs, the company must show that the company’s expenditures for overhead, reinsurance, and projected claims will only be covered if the rates filed are collected.
The rates that are charged must be enough to keep the company financially stable if they want to stay in business.
What Happens if the Companies Rates Are Not Well Researched?
Consumers who are buying a product always want to focus on what happens when they are overcharged, but you should also learn what happens when drivers do not pay enough money when you are buying car insurance. If a car insurance provider does not do their due diligence when they are setting their rates, they could undercharge drivers who are labeled “high-risk”.
With a large pool of high-risk drivers who are paying standard rates, there is a good chance the company will not collect enough premiums to cover the higher rate of claims that will be filed.
Failing to collect enough money from a policyholder happens on an individual basis with every company. It can be very damaging when a company’s entire book-of-business is not paying enough.
This will lead to financial weakness and can affect the company’s ability to pay claims and to stay in business.
So finding affordable rates is important, but it can be dangerous to go with a company before you research their financial strength as well.
Why Do Some Companies Have Lower Rates than Others?
If rates have to be approved by a consumer department, that my have you asking the question why do some insurers charge less than others. The answer to this question is that the marketplace is a competitive one.
In a competitive marketplace, companies can choose which niche they want to target.
Some companies would prefer to do business with good drivers who have valuable cars. Some companies prefer the higher risk drivers because they can charge more while keeping their rates competitive.
When insurers establish their rates, they have a strategy as to which clientele they want. They will be very competitive in that category and less competitive in others. Larger insurers may be better able to attract more than one demographic because they can diversify their investments.
Just because an insurer has a large percentage of marketshare does not make the company the best company for you. This is why comparison shopping is so important if you want to avoid paying extremely expensive rates.
What Are the Risk Factors That Affect the Cost of Car Insurance?
Now that you have a better understanding as to how important it is for an insurance company to set the right rates, you might be wondering which risk factors are affecting the rates of your insurance right now.
The rates can vary from one company to another, but most insurers use the same risk factors to set this rates.
When assessing risk, here are the most important factors that could turn a base rate into an expensive rate:
Age and Driving Experience
The two may sound like one and the same, but age and driving experience are very different. In fact, in some states a company cannot rate their drivers based on age and must use driving experience instead. The two different because not everyone is licensed at the same age.
If someone is licensed at 18 and another is licensed at 25, at 30 the person who have been licensed since they were a teen has more experience. This makes them less of a risk.
Typically, drivers under 25 pay the highest rates for coverage with people in the 15 to 20 age range paying the most expensive rates. Once you get 9 years of experience your rates will drop dramatically. Teens can save money you taking driver education courses and by getting good grades for added discounts.
Gender and Marital Status
Everyone has their own theory to which sex is the better driver. No matter what your theory is, the statistics say that females are safer behind the wheel.
Not only do males receive more tickets, they also get into more accidents and cause more damage. Married males statistically calm down so they pay less than single males.
Annual Mileage and Usage
The more you drive and the more stressful the conditions, the higher the likelihood of you having an accident. This is the explanation to why people who drive more miles per year and people who commute to work pay higher rates.
If you carpool, take the bus, ride a bike, or you work from home you can keep your rates low.
Driving Record and Accident History
This is one of the most well-known rating factors. If you have accidents or moving violations, you are not driving as safely as those who do not. Moving violations may not affect your rates right away, but if you have multiple violations or accidents you may be high-risk.
High-risk drivers pay a surcharge for 3 years, but could lose their good driver discounts for longer than that.
The type of vehicle that you drive can also affect your rates. You might expect to pay higher rates to cover a BMW than you would to cover a minivan, but vehicle value is not the only thing that the insurers consider. A car’s body style, claims record and its safety record are also considered.
When a car causes more damage or injuries, it can have higher rates no matter how expensive it is.
Now that you know what makes car insurance expensive, it is time to start shopping. You can use our FREE online rate comparison tool to see if your current rates are competitive without even leaving home.
All you need to do is enter your information below and review the instant rate quotes. If you find a better deal, fill out your application and save money.