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Why Your Car Insurance Costs What It Does | Cheap Car Insurance

By Michael Giusti

Woman in car accidentIt’s common to look at  your auto insurance bill and feel that what your insurer is charging you it isn’t fair, but in fact, there are actual laws on the books that define what is fair and what is price discrimination.

Each state’s laws are different, and every state has an insurance commissioner enforcing the rules of the road and looking out to make sure that the price you are charged isn’t discriminatory, but instead based on your perceived risk.

For example, in every state it is illegal to set a price based on your race or religion. But beyond that, the details vary.

In general, insurance is priced based on a number of factors that the company believes will represent the risk you pose of getting into an accident, and by extension, costing them money.

That process of determining your risk is called underwriting. This is when the insurance company examines all your personal information and all the historical information it knows about you and decides how risky you are.

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The most common and largest contributor to your rate is your driving record. If you get into wrecks, you cost them money, and they then raise your rates. And if  you got into a wreck in the past, you are more likely to get into a wreck in the future, so up your rate goes.

OK, so that’s fair.

The next big factor in how much you pay is how much insurance you need. Obviously if you get full comprehensive and collision insurance, which would protect you from nearly any calamity, you will pay more than if you opt for the state minimum liability policy. Again, if they are more likely to pay more, they will ask you to pay more as well.

Again, that’s obviously fair.

Insurance factors beyond your control

But, beyond your actual driving record and policy choices you make, they also look at several other factors that might feel a bit like discrimination. Those factors include your:

  • Location
  • Vehicle type
  • Vehicle use
  • Miles driven

Each of these factors are largely choices you have made that the insurance companies’ statisticians say reflect the risk you pose.

So, if you are driving in a densely populated city where fender benders are common, you will pay more. If you are driving a fancy imported luxury vehicle, it would cost the insurance company a lot to replace it if you crashed. If you drive a lot of miles through stop-and-go traffic, there are more chances to get into a wreck than someone who just drives a few blocks to the store and back.

Again, all that seems pretty fair.

Insurance factors you control

Then there are factors that are still in your control, but that might not be as obvious why they matter. Those include your:

  • Marital status
  • Credit history
  • Previous insurance coverage

While it may not be immediately obvious what your relationship status or how you pay your bills have to do with your driving, the actuaries say that statistically it matters. And if you lived dangerously enough to let your insurance lapse in the past, that might be a reflection of how risky you may live in the future. So, while these may or may not seem fair, the insurers and the regulators tend to agree that they point to your general riskiness.

Fair? Maybe.

Then there are some factors that are not in your control but still weigh into your pricing. The easiest one to wrap your head around is age and driving experience. Even though it isn’t your fault that you are under 25, or that you have a teenager in your house driving your car, statistics show that less mature drivers have more accidents than more experienced drivers. Drivers who are new behind the wheel might panic in a tough situation and may be more likely to hit a guard rail. So, younger and less experienced drivers pay more than people with years behind the wheel.

Fun? No. Fair? OK, fine.

Then there is a controversial factor that plays into pricing in some states — gender.

Obviously you can’t change the way you were born, but some statistics show that women tend to have fewer accidents, tend to drive under the influence of alcohol less often, and tend to have fewer serious accidents than men.

On the other hand, some insurers have found the opposite and claim that female drivers posed a higher risk than men.

With that dichotomy in mind, a handful of states have put their foot down and said that since gender isn’t a choice, and is out of the control of the driver, it shouldn’t be used as a factor in setting an insurance price.

California is the latest state to say that setting price based on gender is discrimination. When their law went into effect in early 2019 they joined the likes of Hawaii, Massachusetts, Montana, North Carolina and Pennsylvania in saying that pricing insurance based on gender is discrimination.

So, next time you look at your insurance bill, just know that the insurer didn’t just pick a number out of thin air to charge you. They are basing your cost on what they think they know about you. And while it might not seem fair, at least you can rest assured that the pricing isn’t arbitrary.