We get asked a variety of questions daily in our agency, but the number one question always has to do with pricing. How is it figured? Why is it so high? Why does it differ so much from person from person? And our personal favorite, why does my kid cost so much??
There are a lot of different parts of an insurance policy and the general idea of how pricing is calculated in the auto insurance industry can get complicated.
There are three main parts of an auto insurance policy.
LIABILITY, FISCAL DAMAGE and MEDICAL
Liability – Liability is like gambling. It really is as simple as what are the odds that something’s going to happen and what is the likelihood you are going to get sued. Those factors really drive the price of the liability in the auto insurance policy. This is where the number of drivers and the age of those drivers comes into play. If a driver is young and inexperienced, there’s going to be additional costs, just statistically because of their inexperience they are more likely to be involved in an accident. There is additional liability because that driver does not have experience. It’s also going to be based on the driving records of everyone in the household. If you have previously had an accident, you are more likely to have a second. If you have had three accidents, you are even more likely, etc.
If someone has a speeding ticket, they’re more likely to get sued. Someone has a DUI, they are more likely to get sued for any minor infraction. Insurance carriers will count that against the pricing for three years. Any major infraction, which would be speeding 15 miles per hour over the speed limit, DWI, anything serious like that, insurance carriers are going to count and surcharge for five years on the physical damage side of the auto policy. It’s really about the car, right? Liability side of the insurance policy is meant for protecting the physical damage on that car.
Other factors that go into the policy is where is the car garaged? If it is in more of an urban area, there is more likelihood of a car accident. If your car is garaged in a certain zip code where there is a high rate of cars getting stolen. That along with the value of the car and cost of replacement parts is going to factor into that physical damage portion of the policy.
The medical side in a typical auto policy, if it is written correctly is going to have about $175,000 of medical coverage. The factors that go into that pricing are very similar to the liability. On the medical side, there are some carriers that if there are small children in the home, they will be more likely to be in the car. If that car is in an accident, they’re more than likely going to need medical coverage.
Overall, this is a very high-level explanation of how pricing is determined. Stay tuned as we deep dive into all three parts of an auto insurance policy…
