By Mike DuBose and Blake DuBose
Have you ever wondered why your automobile insurance rate is what it is? Even if you were to find a person with the same type of car who drives the same route you do every day, it’s likely that your rates would vary…but why? It all comes down to a complex system used by insurance companies to determine how good of an investment you are for them.
Most insurance companies decide your insurance rate based on an “insurance score,” which attempts to predict how likely you are to file a claim and whether you’ll be able to pay your premiums. Each agency uses different criteria to reach their conclusions, with some placing more emphasis on certain variables than others. As Scott Moseley of Irmo Insurance Agency told us, “There are so many factors that insurance companies use now it would make your head spin!”
According to research and industry standards, the following are the areas most commonly studied by insurance agencies when deciding rates:
Age and years of experience: The younger a person is, the less experienced they typically are at driving, and inexperienced drivers are at higher risk for traffic accidents. Therefore, car insurance rates tend to decrease with age (until drivers reach their senior years, when declining eyesight and other health issues can make driving more dangerous). If you’ve been on the road for years with no traffic accidents, insurance companies see you as a smaller risk, which can lead to lower rates.
Gender: Males are generally more likely than females to experience car crashes; in fact, the segment of the population with the highest car accident rate is single males under 25 years old. Young men tend to have higher premiums for this reason; however, the difference evens out as adults enter their thirties. Insurance companies are not legally allowed to consider gender in scores in Hawaii, Pennsylvania, North Carolina, Michigan, Massachusetts, and Montana.
Location: Studies have shown that cars in urban areas are more likely to be vandalized or stolen, anddenser populations mean more cars on the road…and greater accident risk. Therefore, city dwellers can expect somewhat higher insurance rates than their rural counterparts.
Marital status: According to a study of over 10,000 adults, never-married drivers are more likely to experience a car accident than those who are wed, divorced, or widowed. Reflecting this trend, Insure.com reports that married couples may see rates 5-15% lower than those who are single. Massachusetts is the only state to disallow rating based on marital status.
Credit history: In some states—including California, Massachusetts, and Hawaii—it’s illegal to consider a person’s financial credit score when determining a car insurance score. However, when allowed, credit scores and history play a significant role in deciding what consumers will pay. Moseley noted, “Credit scoring has a huge impact on rates, especially on personal auto rates.”
Insurers assert that data has shown a correlation between low credit scores and higher frequency of fraud, inflated claims, and the number of claims being filed. Some companies ask that those with bad credit pay the entire premium up front before issuing their policy. Major negative credit events, such as bankruptcy or severely delinquent accounts, can even prevent some individuals from obtaining car insurance!
The type of vehicle you drive: Insurance companies conduct extensive research on which types of vehicles are connected with the most claims. If you buy a car that their data says results in lots of accidents or claims, be prepared to pay more. Autos with high safety ratings tend to earn better scores, while flashy sports cars (which are more likely to be stolen and cost more to repair in the event of an accident) are penalized.
How much you drive: Casual drivers often achieve better rates than individuals who commute long distances each day. The reason is simple, as State Farm Insurance Company notes: “The more miles you drive in a year, the higher the chances of a crash—regardless of how safe a driver you are.”
When a vehicle is used for business or ridesharing (such as Uber or Lyft), miles on the road increase…and so do risks and insurance rates. If you use your car for either purpose, call your agent to ensure you are fully covered, as you will likely need more protection than a personal policy offers.
Coverage: If you have policies that cover beyond the absolute minimum required by your state, costs will increase. However, it can save you a great deal of money down the road to have more than basic coverage!
Your driving record: Drivers who are convicted of breaking traffic laws represent a higher risk to insurance companies, and they pay for it! According to Insure.com, minor violations like speeding tickets can raise rates by 20-40%; major issues like being arrested for driving under the influence can skyrocket it 100%! Those with multiple serious offenses may even find that no insurer is willing to cover them.
Previous insurance coverage and claims: Making many claims over a short time period marks you as a risky investment and will increase your rates (although if you are found not to be at fault in an incident, there may not be an additional charge). Even roadside assistance and towing coverage, although relatively inexpensive to add to a policy, “result in some hefty additional premiums” when too many claims are filed, according to Justin Hayes, Vice President and COO of Independent Insurance Brokers & Associates.
One area that Hayes particularly urged caution in filing was glass claims. Because there is no deductible for glass claims in South Carolina, policyholders may assume that they do not affect their premiums; however, that is not the case. “Unfortunately, a glass claim filed is a comprehensive claim filed that can certainly cause an increase in premium, particularly if these are filed frequently,” Hayes said.
Lapses in coverage are particularly troubling to insurance companies and can cause a significant boost in rates. Even if you’ll be storing a car for a while without driving it, consider keeping your policy active (but reducing the coverage to the minimum to decrease costs).
Loyalty: Discounts for years of coverage with the same company are possible. “Insurance companies look at the number of years a family may have been insured with their prior carrier,” Moseley said. “A couple that moves their insurance each renewal for a better rate may not get the same rate as someone that has been with the same carrier for 5-plus years.”
So, how can you obtain more favorable rates? First, consider employing an independent insurance agent who is not attached to one specific company so that he or she can shop around. An independent agent has more flexibility to tailor your coverage to your specific needs while also seeking out the lowest possible price.
Then, think about the factors that play into car insurance scores and do what you can to improve in those areas. Obviously, you’re unlikely to move to the country to save money on your insurance payment, but you can make efforts to avoid traffic violations (and thus improve your driving record) or buy a safer model car next time you’re shopping at the dealership. Another tip from Moseley: “Folks who combine their auto, liability, boat, and home with the same insurance company will see the most savings.”
Some insurance agencies also offer discounts for taking driving safety courses, insuring multiple vehicles, and driving for a while without having any accidents. Hayes noted that insurers are now using “telematics” to track driver behavior and distance traveled. “If a policyholder is willing to share this information, the savings can be significant” in terms of reduced premiums, Hayes said. The information is collected either via smartphone or by plugging in a small box into the vehicles OBD II or CAN-BUS port, typically located under the driver’s side dash.
You can also make a significant difference by addressing non-vehicular aspects like your credit score. By paying down credit card debt and ensuring you make monthly payments on time, you can raise your credit score, which can translate to a higher insurance score and therefore lower rates. (See this blog for ways to improve your credit score.)
The bottom line: The process for determining individuals’ insurance rates is complex and detailed. Many factors are considered to create an insurance score, which goes on to affect the amount that consumers pay…and if they can even obtain insurance at all! However, with research and effort (and maybe some comparison shopping), you can obtain your best possible rate!
About the Authors: Our corporate and personal purpose is to “create opportunities to improve lives” by sharing our knowledge, research, experiences, successes, and mistakes. You can e-mail us at [email protected].
Mike DuBose received his graduate degree from the University of South Carolina and is the author of The Art of Building a Great Business. He has been in business since 1981 and is the owner of Research Associates, The Evaluation Group, Columbia Conference Center, and DuBose Fitness Center. Visit his nonprofit website www.mikedubose.com for a free copy of his book and additional business, travel, and personal articles, as well as health articles written with Dr. Surb Guram, MD.
Blake DuBose graduated from Newberry College’s Schools of Business and Psychology and is president of DuBose Web Group (www.duboseweb.com).
Katie Beck serves as Director of Communications for the DuBose Family of Companies. She graduated from the USC School of Journalism and Honors College.
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