Pricing Risk

By Author: Norris Rios
Total Articles: 572
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When the news media all seem to be telling the same story, it's easy to believe it must be true. When you go on to look at the complaint sites and blog postings, the same bad news story is repeated. This confirms your worst fears. It seems the insurance companies only ever increase the premium rates and conspire to gouge every driver on US roads. Except this is not the whole story. Let's go back to the beginning. When the idea of insurance was first being discussed back in Lloyd's coffee shop, the idea was that merchants who all faced the same risks of fire and theft should group together. If they all paid into a central fund, there would hopefully be enough money to cover the losses of one should there be a fire.

Over time, this has become a very sophisticated operation, but it all comes back to some very simple rules. If you have a poor driving record with multiple tickets, you will pay more than the luckier driver who manages to avoid accidents and tickets. It's the same with the make and model you choose to drive. Pick something fast and sporty, and you will be paying more than the boring person who picks something ...
... steady that performs well in crash tests. Then there's your address. If you are a street-parker in a zip code area with high theft rates, you will pay more than someone with a garage in a low crime area. And so on.

In other words, there's an element of common sense when it comes to judging risk. You could probably look around your circle of friends and guess which ones are more likely to end up with their vehicle in a body shop. So, when it comes to putting a price on the risk, the process for setting the premium rate is more personal than you might imagine. Yes, you're being put into a group but membership is judged by a host of facts drawn from your life. In theory, this is what makes insurance fair. In practice, the groups are broadly defined and, the closer you are to the dividing line between groups, the more fair or unfair the decision may seem to be. So to even things out, insurers offer discounts and bonuses to help people feel better about their premium rate.

Let's take the idea of a loyalty bonus. The longer you drive without making a claim, the more you prove yourself a safe driver. Insurers want to keep your business so many will offer you an annual bonus to renew. This will either prevent you from being affected by a general premium rate increase, or actually reduce your rate. It's the same if you agree to pay a higher deductible. This reduces the risk the insurer will have to pay out so your premium is reduced. But, just as there are incentives, there must also be deterrents. So if you drive badly and cause a lot of damage, the insurer will increase your rates when the next auto insurance quotes come your way. So to keep your car insurance rates as low as possible, drive safely, protect your credit score, live in the right neighborhood, and so on.