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Why Is My Auto Insurance Premium Rising?

insurancerateIt’s time to renew your auto insurance. When you open your renewal notice, you discover that your premium has jumped by $15 a month. But you didn’t get any tickets and you weren’t involved in any accidents. Why, then, is your premium rising?

Consumers often think that their auto insurance premiums won’t rise if they have a clean driving record. What they don’t know is that other factors sometimes cause the cost of insurance to jump.

Some of these factors are obvious: Your rates will increase if you add a new teen driver to your insurance. They might also rise, though, if you move to a new neighborhood or get a new car.

They might even jump if the drivers in your metropolitan area get in a lot of their own accidents, despite your perfect driving record.

Factors affecting insurance premiums

John Erickson, vice president and chief product officer at Wawanesa General Insurance Company in San Diego, says the goal of insurance companies is to collect enough premiums to pay their losses and cover their expenses. This means that they must predict in advance how many losses they will pay and what the average costs of these losses might be.

Insurers rely on a host of factors to determine how likely you are to get into an accident and file a claim on which they’ll have to pay. This includes your driving record, the miles you drive in a typical year, how many years you’ve been driving, the car you drive and where you live.

But insurers also look at more macro factors.

“Over the past few years, insurance companies have seen the number of accidents and associated claims sharply rise,” Erickson said. “This is a result of multiple factors, the two largest being increased driving as the economy strengthened and more distracted driving as smartphones became an integrated part of our daily life.”

So your rates might rise simply because people are still answering text messages while driving and, because they’re earning more money, are spending more time on the road taking trips.

At the same time, the cost involved in settling accident claims has risen during the last several years, Erickson said. Newer vehicles simply cost more to repair, which means that auto insurers often have to pay out more to their clients who have suffered accidents.

“A bumper repair that once cost $1,500, can easily reach $5,000 or more on a new car with sensor technology,” Erickson said. “The cost of medical services for people injured in accidents has been increasing much faster than general inflation.”

A hike with a clean driving record?

Abigail Vytlacil, licensed insurance agent with League City, Texas-based Larry Hudson Insurance and Financial Services, says that it’s not uncommon for drivers to get hit with premium hikes even if they’ve done nothing wrong on the roads.

That’s because most insurance carriers factor their rates on the law of large numbers. This means that individual drivers are pooled into a group based on geographic location, usually a township, city, county or zip code. The overall risk for each region is determined by the total number of claims and the total amount paid out for claims in that area.

Vytlacil points to Houston as an example. The Houston market, of course, has a lot of drivers and heavy traffic. Commuters here drive an average of 30 miles to and from work each day. This means that the Houston market is a risky one for auto insurers. And if the accident ratio for the area in which you live goes up? Your premium might do the same.

“So, you may not have had an accident, but the accident ratio for the group you’re in might have increased,” Vytlacil said. “That means your policy presents more risk to the company. Your rate will go up because the company feels like you present a higher risk and the likelihood of an accident, even one not your fault, has gone up.”

Individual insurance factors

Sophia Borghese, a consultant for auto dealer Superior Honda in Harvey, Louisiana, said that there are other, more individual decisions that motorists make that can result in premium increases.

Maybe you took a new job that pays better. But maybe that same job comes with a longer commute. That can pump up your auto insurance premium. Or maybe your former employer offered you a group discount on car insurance. That discount will disappear when you take on a new job.

Then there are your children. When your young children start driving, expect your auto insurance rates to soar. That’s because younger drivers are more likely to get into accidents. When you put these teen drivers on your insurance, your insurance company will have to increase your rates to make up for this risk.

Moving can impact your insurance rates, too. Maybe you’ve moved into a zip code that has higher rates of car break-ins. This can cause your insurer to tweak your premiums.

“Even if you have yet to rear-end a driver or fall into a treacherous pothole, your insurance rate might still increase,” Borghese said. “Seeing a rate change if you haven’t done anything is nothing but a source of frustration. However, there are many things other than claims and fender benders that rack up insurance rates.”