One of the primary complaints about car insurance is that it is so costly. Prices do vary from state to state and from individual to individual, but it remains true no matter who or where you are that insurance is expensive. When you combine car payments, routine maintenance, and emergency repairs with the price of insurance, owning a car can become a strain on any budget. It’s important to make sense of why car insurance costs so much by taking a look at what goes on behind the scenes. Part 1 looks at how car insurance works and Part 2 explains how companies determine your rate.
Part 1 of 2: How car insurance operates as a business
Keep in mind, first of all, that insurance is a business. Like any other business, insurance companies need to turn a profit in order to sustain the company in existence and provide valued services to you. This means that the price you pay for insurance is carefully calculated in order to contribute to the overall financial success of the company.
There are a wide variety of insurance plans, and the cost is going to depend largely on what your plan covers. As with anything, more services mean you pay a higher rate in exchange for those services.
If you have a very basic plan that only covers what is mandated by law, then you’re going to have a smaller bill than someone else whose plan has lots of extra benefits included, such as new car replacement or loss of use coverage.
With that in mind, let’s take a more concrete look at how rates are calculated.
This is a complex procedure, but one major part of the process involves analyzing the risk a driver presents. This risk is reflected in the possible money an insurance company will need to spend on your behalf. Again, since insurance is a business, the company must take in more dollars than it spends.
Part 2 of 2: How insurance companies determine your rate
Some common indicators of risk might be an erratic driving record in the form of speeding tickets, a history of accidents and other claims, and possibly even credit history. In the eyes of insurance, these factors paint a picture of your future driving behavior and the likelihood that you will cost the company money.
The greater the likelihood you will get in an accident, for example, the higher your rate, since the insurance company is obligated to pay for whatever costs you incur that they promised to cover. In the end, you are willing to pay a premium for the peace of mind that the insurance will be there for you, and they charge you a premium based on the likely cost to cover you.
These indicators reliably quantify how much financial risk a driver poses to the insurance company. If you are known to drive dangerously and get into accidents, these means you will very likely have a higher rate, since your insurance will be picking up the tab for your driving mistakes.
On the other hand, if you have an impeccable driving record and have no demerits counting against you, it is likely that you will have a lower rate since you are not a financial liability.
In effect, the insurance company is trying to match up how much you will cost them to how much you should pay. The rate you are given is a prediction, then, of how you are expected to behave as a driver.
This does not mean, of course, that the company should take advantage of you or artificially inflate their rates. In fact, a vital part of being a responsible consumer is researching a company’s policies, procedures, and overall reputation to determine if they are worth they the money you will be charged and are giving you a fair price based on your particular driving history and their competitor’s rates.