Have you ever wondered why your best friend's auto insurance premiums are lower than yours? There could be a lot of reasons for the difference, but it's mostly about who you are. Insurance companies rate each potential insured based on how they compare to the average driver. They examine similarities and differences and charge premiums based on the perceived exposure your profile presents.
When an underwriter calculates your policy premiums, he or she begins with a basic rate as published by ISO or a similar rating service. Each state's statutes govern all rates, so they must be approved before they can be used to calculate your premiums. Underwriters factor in your personal information to complete the rating process. Major Insurance, founder of the Safe Driver Scholarship stated, “If you and your best friend are more different than alike, your premiums will never be the same.”
It's All About Questions and Answers
When you apply for an auto insurance policy, your agent or the insurer's online app asks a lot of questions. Your answers help determine your premium. If your best friend lives only a few doors down, many of your responses: your city, street, neighborhood, police access, traffic, and safety, will be the same. The answers that are different can result in a higher or lower insurance premium.
Where do you live?
If you reside in a major city and your friend lives in a small town, your risks are greater; therefore, your premiums are higher. Heavy city traffic means you are more likely to be involved in an accident.
If your actions cause a personal injury, the claim settlement or judgment is likely to be higher. Physical damage premiums are higher in major cities because repairs cost more. Also, your car has a greater chance of being stolen in a big city than in a small town.
What kind of coverage do you want?
Your friend may have decided on a bare bones policy with cheaper premiums and minimum limits or only the coverages required by the state. If you requested higher limits for greater protection and what's traditionally called "full coverage," you will pay more.
While you'll never see the term "full coverage" on your auto policy, the policy is understood to offer all the major coverages: liability, collision, comprehensive (other than collision coverage), medical payments, and uninsured and underinsured motorist coverages.
What's the highest deductible you can handle?
A deductible is the dollar amount you agree to pay when your car needs repairs due to a covered occurrence. If your friend opted for a high deductible, he or she agreed to pay more when his or her car is damaged. That's a choice which lowers premiums.
What kind of car do you drive?
Premiums go up or down depending on your vehicle. If you drive an SUV, it's bigger size can cause more damage. Your liability coverage premium will be higher than your neighbor's subcompact.
The premiums you pay to cover damage to your auto will be higher as well. Because of your car's size, it requires bigger parts and more labor, and that means a bigger repair bill. The higher book value means your insurance company will pay more if it's totaled or stolen. These same principles apply to expensive luxury cars.
What is your driving history?
If you've had multiple tickets, an auto-related conviction, a suspension, or a financial responsibility filing, you may be rated high risk, and your premiums will be higher. In fact, you may have to obtain insurance from a company that insures only high-risk drivers. If your friend has never had a single ticket or an accident, their safety consciousness will translate to lower insurance premiums.
How is your credit?
Your insurance company won't ask you about your credit. They will ask your permission to request a copy of your credit report. As with many financial issues in your life, your credit rating affects your insurance premiums. Because credit is considered a measure of financial and ethical responsibility, a high score may give you a better insurance premium. If you have a poor credit rating, you will likely only qualify for a low limit, high premium insurance policy.
By the time you answer the full range of insurance application questions, you may feel that you've revealed a little too much about you and your family. Insurance companies prefer to know who and what they are dealing with so they keep asking questions until they have enough information to figure it out.
- Are you under 30 or over, married or single, male or female?
- Do you use your car to commute to work each day?
- How much mileage do you put on your car each year?
- Do you have teenage drivers in the house?
Talk to an Insurance Professional
When an insurance company asks questions like these, they aren't just nosy. Each response has a rating factor that can increase or decrease your auto insurance premium. When they finish, they will request a copy of your driving record and credit report to confirm some of the facts you've shared.
There could be a lot of reasons your auto insurance premium is higher that someone else's. If you want to know more about how insurance companies calculate policy premiums, learn more at majorinsurance.com/auto-insurance/.