Insurance can be confusing for many of us. You may wonder how the cost of your premium is determined or why rates go up if you haven’t had any changes to your policy. Here is a bit of information that can hopefully clarify things if your auto rates go up.
The idea of insurance can be thought of as the following:
- Insurance is essentially a promised indemnification per contract – indemnification means to compensate.
- Basically this means you are in a contract with your insurance company where they agree to pay or “indemnify” you for covered damages when you pay your premium.
- Your premium – or what you pay the insurance company to insure you is derived from “a pool of risk”.
Hopefully we haven’t lost you yet. Things get a bit simpler from this point on…
Here’s why your rates can fluctuate from one policy term to the next.
Everyone the company insures brings some level of risk or chance of having a loss to the pool.
There are obviously higher risk people such as young and inexperienced drivers or drivers with lots of accidents or tickets.
There are also drivers with lower risk who based on their lifestyle, age, and driving record are known to on average be “less risky”.
There are many other risk factors that affect rates which can include but are not limited to:
- the type and age of the vehicle you drive
- your credit score to a degree
- whether you are single or married
- the area you live in
In a nutshell, insurance companies take the information based on your specific history and marry it to the information from the history of other people in the pool to come up with a rate. This is called underwriting.
You may have heard of the term underwriting but weren’t sure who or what it was.
The short answer is that people who perform this task use a lot of math and statistical data to create tables that then go into what is known as your “insurance score”.
This score is how the insurance company comes up with an amount to charge you for your coverage.
Other factors that can change the premium include things such as:
- discounts like packaging your home and auto
- adding new drivers to your policy
- moving to a new zip code
All of these will impact your rate for the better or worse.
Of course most people with a poor driving history aren’t surprised to learn that they will pay significantly higher premiums.
But YOU already are a good driver!
You don’t speed. You haven’t had a ticket in so long you can’t remember – or maybe ever! You drive a safe vehicle, own your home, have kept consistent coverage, and are accident free.
Why do your rates go up?!?
Well that’s where the “pool” in risk pool comes in.
Unfair as it may seem, we are all paying in a way to cover not only ourselves but all of the drivers in the pool. Lower risk drivers pay lower rates than higher risk drivers, but we all pay in to the pool.
And to make matters worse, when insurance companies pay out a lot of money to drivers for claims over a certain period, they need to recoup those losses. In order to do that rates are going to go up, and go up across the board.
An example of this might be the severe hail storm we had over the summer. Cars all over the city suffered damage and people claimed those losses causing insurers to pay out millions of dollars.
Because storms are getting more severe statistically, we should all expect to pay more for the same protection.
Luckily you’re smart and chose an independent agency like United Insurance Agencies & Affordable Auto Insurance to help you with your insurance needs!
As independent agents we work with multiple companies so if the rates with one company don’t meet your budget, we can shop on your behalf to find you the lowest premium possible!
Are you fed up with constant rate increases? If you haven’t checked rates in a while, give us a call and let us find you a price you can work with. Give us a call! 402-492-8020