Underwriting and Rating

Two factors determine what you pay for auto insurance. These factors analyze your characteristics and determine the risk that you present.

The first factor is underwriting. Insurance companies underwrite to assess the risk associated with an applicant, group the applicant with other similar risks and decide if the company will accept the application.

The second factor is rating. Based on the results of the underwriting process, the rating assigns a price based on what the insurer believes it will cost to assume the financial responsibility for the applicant's potential claim.

The purpose of underwriting is to sort applicants into groups of people that present similar risk and accept, deny or limit coverage for each group of applicants. What that means to you is that you will be grouped with other applicants and policyholders who have similar risk-related characteristics. Therefore, if you can lower your level of risk, you can be grouped with others with lower risk.

A rate for each group will be set based on the claims paid by the insurer for the people in that group. The higher the average losses from a group, the higher the rates for that group. Therefore, it is an advantage for you to be in a low-risk group.

Insurers depend on information on your policy application. When you apply for insurance, you will be asked a series of questions. The purpose of these questions is to assess the likelihood of your filing a claim.

Insurers want to know your driving record. In addition, insurers want to know certain personal characteristics to group you with other drivers. Insurers review the claim history of your group to project future claims.

Some of these characteristics are beyond your control, such as age and gender. Other characteristics can be controlled but, since they relate directly to lifestyle or income, are difficult to control. These characteristics include geographic location and usage of the vehicle. A third set of characteristics is highly controllable, such as the make and model of vehicle the consumer wishes to own and insure. A vehicle with few safety devices and a powerful engine carries greater risk of high claims than a less sporty model. The consumer has a great deal of choice, or control, over his or her decision to own a high-risk vehicle.

Insurers also consider lifestyle characteristics in the underwriting process. These characteristics include marital status and employment history. From prior claims data, insurers know that married persons tend to have lower claim levels than unmarried. Other statistics show that persons who work in the same place for a long time tend to have lower claims.

The second factor that governs the cost of your auto insurance is rating. Like underwriting guidelines, each company adopts its own rating system, although there are general guidelines that all companies follow.

Commonly asked questions related to loss history include:

  • Driving Record. On the policy application you will be asked about your driving record. Insurers will ask about accidents and traffic violations for any driver covered by the policy for preceding 3-5 years. Drivers with previous violations or at fault accidents are considered to be a higher risk and may be charged a higher rate.
  • Territory. The claims experience of people in your area will also affect your rates. Applications include a question that asks for thc address where the vehicle will be garaged. From this information insurers can tell a great deal about your risk of financial loss. From your claims experience, insurers know that more claims are made from urban areas than rural areas (busy traffic, thefts, vandalism, etc.).
  • Gender and Age. Statistically, males still have more accidents than females. For that reason, young men may tend to pay more for insurance than young women. (A small number of states have prohibited insurers from using gender as a factor in underwriting.) Insurers also have statistics that show a higher number of claims for some age groups than for others.
  • Marital Status. Insurance company claims statistics show a lower rate of auto insurance claims among married policyholders.
  • Prior Insurance Coverage. In some states insurers may ask you if you had insurance coverage previously. If you have previously been cancelled for non-payment of premiums, insurers want to know. If you have had insurance, your new insurer may ask your prior company about your claims history. Different insurance companies specialize in particular classes of business. Large insurers may form subsidiaries for preferred (low risk), standard and non-standard (high risk) business.
  • Vehicle Use. You will be asked on the application about how often and how far you drive the vehicle you want to insure. Higher annual mileage will generally result in higher premiums because of the higher exposure to risk.
  • Make and Model of Vehicle. The type of car you drive will directly affect the cost of your automobile insurance. A make or model of car that has a high number of claims or higher claims cost will be charged a higher premium for comprehensive and collision coverage.

The single greatest influence on the rating process is claim frequency. This does not mean how many times you specifically have made an insurance claim, although that will have an additional effect. Claim frequency measures how often an insured event occurs within a group relative to the number of policies contained in that group. Persons sharing characteristics with high-claims groups will be charged more for insurance coverage. At the same time persons who share characteristics with low claims groups will be charged lower rates. In addition, insurance companies offer discounts to individuals who exhibit certain characteristics.

Discounts are awarded because the insurance company sees you as a "better risk." You should be aware of what discounts are offered by what companies before buying auto insurance. Not all states allow the same discounts to be used. Here are some discounts you should look for:

  • Multiple Vehicles. Most insurance companies offer a discount to consumers that insure more than one car with their company. Companies offer these discounts not only because they want all of your business, but also because it is easier for them to under-write individuals that they know; thus, reducing their risk and saving the company money. In addition, industry statistics show that individuals and families that insure more than one car have a better than average claims experience. Through this discount companies pass along some of their savings to you.
  • Driver Education Courses. Discounts for driver education courses are targeted primarily at younger and older drivers.
  • Good Student. Insurers have found that students who are responsible enough to earn a B average or better tend to be more responsible drivers. For that reason, many companies offer a "Good Student Discount."
  • Safety Devices. Automobile safety devices can lower insurers' costs by preventing accidents or limiting their severity. These savings are passed along to the policyholder through discounts for safety equipment. This equipment includes air bags, automatic seat belts and anti-lock brakes.
  • Anti-theft Devices. Devices or systems that deter theft or vandalism also lower claims costs. Many companies offer discounts for anti-theft devices.
  • Low Mileage. The fewer miles you drive the less chance you have of getting into an accident. Insurers recognize this fact and generally offer discounts for low mileage drivers. Some companies also offer discounts for drivers that participate in car-pools.
  • Good Driver/Renewal. Some insurers offer discounts to drivers who maintain a good driving record and renew their policy with the same insurer.
  • Auto/Home Package. Some insurers offer a discount on one or both policies if an individual buys a homeowner policy and an auto policy from the same insurer.
  • Dividends. Some insurers, particularly mutual insurers, offer dividends to policyholders if the sale of auto insurance has been profitable to them. Dividends are declared and paid after the policy period has expired.

Discounts are not only ways for companies to attract customers, they are also ways for companies to compete and retain business. So when you shop, do not just ask if a discount exists, but also ask how much you save. Savings can differ from company to company. In addition, consumers should make sure that they receive the discounts for which they qualify. When comparing the price of insurance between different companies, compare the total cost after any discounts.