Factors That Affect Auto Insurance: From A Consumer Standpoint

(Rev. 10/05)

There are many variables that determine auto insurance premiums. They are built on a foundation of loss experience, factors such as inflation, and your personal situation. The following are some of the key factors that influence premiums from a consumer standpoint.

Age and driver classification

In most states, age, sex and marital status are recognized as reliable ratemaking criteria. Who can argue with the fact that the highest premiums are assigned to youthful drivers, who as a group have the worst driving record?

Youthful driver insurance premiums are based on years of statistical information. National Safety Council (NSC) statistics show that 46 out of every 100 licensed drivers age 19 and under, and 22 out of every 100 licensed drivers 20–24 years of age, were involved in crashes in 2003. NSC also reports that people under 25 represented 13.2% of the US driving population in 2003, but over 40% of all drivers involved in crashes. Also of note is the fact that drivers 25-34 years of age comprised 17.3% of the US driving population in 2003 and nearly 18% of drivers involved in crashes.

As a general guideline, families can expect their auto insurance premiums to at least double when adding a new teen driver to their policy.

Of the estimated 196.7 million licensed US drivers in 2003, 50.1% were males. Males account for 62% of the miles driven each year and have a higher fatal accident involvement rate than females. According to the NSC, male drivers were involved in about 40,000 fatal crashes in 2003. Female drivers were involved in 14,000 fatal crashes.

The Insurance Institute for Highway Safety (IIHS) reports that between 1975–2003, female deaths in motor vehicle crashes have increased 14% compared with an 11% decline in male deaths. The increase in female deaths is largely due to an 80% increase in deaths of female passenger vehicle drivers since 1975.

In states that use the driver’s sex as a factor, women are generally better risks on the road than men and are charged less for insurance. Men typically drive more miles than women and engage more often in risky driving practices including not using a safety belt, driving while impaired by alcohol and speeding. However, the premium gap has begun to narrow. The nation’s largest auto insurer charged 16–20 year-old boys 61% more than girls in 1985, and only 41% more now.

1 1997–2004
2 1994–2003
Source: Insurance Information Institute, Fact Book 2005

In 1912 there were 950,000 registered vehicles in the US and 3,100 related fatalities. In 2003 there were 44,800 fatalities and 240 million registered vehicles.
(National Safety Council, Injury Facts 2004 edition)

Driving record

Statistics show that those involved in at-fault crashes or convicted of a serious traffic violation are more likely to be repeat violators. The fact is that if you are involved in an at-fault crash or acquire more than one traffic citation, your insurance premiums will be adversely affected. Conversely, if you maintain an accident-free record, you will likely receive the best rate an insurer has to offer.

Most companies offer safe driver discounts to policyholders who remain accident-free for a set period of time.

Nationwide Insurance, Ohio’s third largest private passenger auto insurer, released a study in March 2004 regarding the impact of crashes and moving violations on auto insurance premiums. OVIs (Operating a Vehicle Under the Influence) and drag racing infractions could cause premiums to double the year after the violation and an at-fault crash can increase premiums by 50%. Less severe infractions are assessed a “surcharge” on a sliding scale over multiple years. A speeding ticket, for instance, may cause premiums to increase 25% the first year, with surcharge reductions taken in ensuing years if no other infractions occur. Multiple infractions can cause premium hikes of up to 50% the insurer reports.

Type and age of car

Family sedans typically cost less to replace and typically less to repair than SUVs, and luxury or sports car models.

Up until a few years ago, liability insurance and medical payments coverages were not affected by vehicle make and model. Before then, only collision and other than collision coverages (comprehensive) were affected by vehicle type. Some companies now use their claims data on various makes and models to help determine liability and medical payments coverage premiums.

The National Highway Traffic Safety Administration (NHTSA) provides an annual report that helps in comparing insurance costs for different makes and models based on damage susceptibility. The most recent report (March 2005) is based on HLDI’s December 2004 Insurance Collision Report, and reflects the collision loss experience of vehicles sold in the US in terms of the average loss payment per insured vehicle year for model years 2002–04. Click here to view NHTSA’s March 2005 report.

Although there are insurance companies that use HLDI’s data to adjust the “base rate” for the collision portion of insurance premiums, the amount of any such adjustment is usually small. It’s unlikely that a total premium will vary more than 10% depending upon the collision loss experience of a particular vehicle, according to NHTSA. So, if you do not purchase collision coverage or your insurer does not use the HLDI information, your premium will not reflect these findings.

NHTSA also states that insurance companies don’t generally adjust premiums based on data reflecting the crashworthiness of different vehicles. However, some companies adjust premiums for personal injury protection and medical payment coverage if the insured vehicle has features that are likely to improve its crashworthiness, such as air bags.

As noted in the section “Factors from a Company Standpoint,” this additional rating criteria for liability insurance and medical payments coverage insurance is partly due to the increased popularity of SUVs and the potential damage they can inflict on smaller vehicles.

Passive restraints such as seat belts and air bags are standard on new cars and have been for several years. Insurers now recognize that some newer makes and models have taken safety features to the next level, reducing the risk of injury to an even greater extent. As a result, insurers may decide to use this as a factor in determining future medical payments coverage premiums.

Use of car

If the “little old lady who only drove to church on Sundays” truly existed, she’d be charged a lower premium than most. Cars driven to and from work are more vulnerable to crashes than those driven strictly for pleasure. Work-related driving tends to usually occur in heavier traffic conditions.

Some insurance companies look at such variables as the number of miles a car is driven annually, using 12,000 miles per year as the average. This is because the chance of becoming involved in an accident increases with the number of miles that are driven annually. So, if the vehicle is used for business (not to be confused with driving to and from the principal place of employment), the additional mileage could influence coverage costs.

Conversely, most farmers enjoy lower rates because their vehicles are seldom driven in heavy traffic. This discount does not apply to vehicles used by farm family members engaged in occupations outside of farming that require transportation to and from work.

Where you live

The chances of filing an insurance claim for injury, vehicle damage or theft go up as the number of passenger cars per square mile increases. According to a March 2004 Q & A report by the Highway Loss Data Institute (HLDI), crashes that cause injuries and/or property damage occur at the highest rates in urban areas. Fatal crashes, however, are more likely to occur in rural areas. A 2001 Insurance Research Council study of a national sample of automobile crash injury claims found that about 80% of the crashes occurred in urban areas.

Rating territories are designated geographical areas used by auto insurance companies to accumulate statistics such as population density, traffic congestion and other factors affecting exposure to accidents. The arbitrary division of Ohio into territories for rate development is as necessary as the boundaries developed for tax structuring. An insurance company cannot divide a city into separate territories. But it can have different rates for each city in a county and dozens of territories across the state. A territory’s insurance claim record generally is affected by traffic patterns, road conditions, the quality of law enforcement and local costs associated with auto repairs and hospital and medical services.

A Progressive Insurance study released in May 2002 reported that 77% of traffic crashes occurred within 15 miles of drivers’ homes. Conversely, 1% of reported crashes occurred 50 miles or more from home.

The US Department of Transportation reports that in 1999, 60% of all vehicle fatalities occurred in rural areas and 64% of all speed-related fatalities occurred on rural roads. 2002-04 figures from the Ohio Department of Public Safety support this trend:

2002–04 Ohio Urban and Rural Crash Fatalities
Year Urban Fatalities Rural Fatalities Total
2002 421 996 1,437
2003 360 918 1,278
2004 414 871 1,285

Source: Ohio Department of Public Safety

Maintaining good credit

As noted in the section on insurance company factors, maintaining a good credit history not only benefits financial aspects of your life, but also what you pay for auto insurance.

There is a proven correlation between the way you handle credit and how responsible you will be as an insurance risk. An insurance score uses some of the information found in your credit report, so by maintaining good money management, your insurance premium may indirectly benefit. To improve your credit score, and possibly lower your insurance premiums in the future:

  • Pay bills on time. Delinquent payments and collections negatively affect your score.
  • Keep balances low on unsecured revolving debt like credit cards.
  • Apply for new credit accounts only as needed and close accounts on credit cards no longer in use.
  • Review your credit reports annually to check for inaccuracies. Not all inaccuracies affect an insurance score, but it’s a good idea to keep them as error-free as possible. As of March 1, 2005, Ohio residents can receive a free credit report from one or more of the major credit reporting services (TransUnion, Experian, or Equifax) once every year. Reports can be ordered online at: www.annualcreditreport.com or by calling 877-322-8228. Additional information is available from the major credit bureaus:

Equifax: www.equifax.com / 800-685-1111
Experian: www.experian.com / 888-397-3742
Trans Union: www.tuc.com / 800-888-4213

Available discounts

Motorists can generate savings on insurance by maintaining a safe driving record and committing to certain life-style changes. Employing driver discounts can mean a savings in the 10–20% range off the bottom line of an auto insurance premium. Some companies offer a discount for remaining accident-free or violation-free for a specified number of years. Some offer discounts to long-time, loyal policyholders.

Though they vary from state to state and company to company, most insurance companies offer auto insurance discounts such as:

  • Good student discount: For high school or college students over the age of 16; usually contingent on maintaining a B or better grade average.
  • Antitheft device discount: Available from some companies for vehicles equipped with alarms or disabling devices that reduce exposure to theft.
  • Multi-car discount: Available to those who insure two or more cars with the same company.
  • Multiple policy discount: Available from some companies to individuals carrying more than one policy (i.e., auto, home, life and/or health) with the same company.
  • Deductible discounts: You can reduce your premiums if you shoulder the smaller losses. Increasing deductibles from $200 to $500 could reduce your collision and comprehensive premiums by 15–30%. A $1,000 deductible can save you even more.
  • Resident student discount: Offered by some companies to an insured with a resident student, without a car, at a college more than 100 miles from home. A premium reduction may be available to those taking a car, depending on the college location.
  • Safety feature discount: Available from some companies to drivers of cars with air bags or daytime running lights. New York, New Jersey and Florida provide discounts for antilock brakes (ABS). Some companies have national discounts in place, while others have phased these out since most newer makes and models provide air bags and ABS systems as standard equipment.
  • Nondrinker and/or nonsmoker discounts: These are usually offered by specialized insurers.
  • Completion of a state-approved senior driver defensive course: Senior drivers 60 and older in Ohio can obtain a discount by completing an accident prevention course. (See next section for a list of state-approved programs.)
  • Commuter or carpools: If your mileage is limited or you take public transportation to work or carpool, ask if a mileage discount is available.
  • Driver training discount: For young drivers upon completion of a driver training course. In Ohio young drivers under age 18 are required to take a drivers training course so this factored into young driver premiums and is not typically offered as a “discount.”
  • Other discounts: Low annual mileage, safe driver discount for remaining free of moving violations and/or crashes for three years and policyholder loyalty discounts for remaining with an insurer for a set period of time.
More children remain on their parents’ auto insurance policies even when they are well into their 20s and have graduated from college. About one-third of drivers in their 20s are covered by auto policies paid for by someone at least 20 years older. Chubb Corp. reports that the number of policyholders whose coverage includes at least one other driver in the age range of 21–25 has increased by 11% over the last two years. Other major auto insurers report similar trends. Data from A.M. Best Co., State Farm Insurance Cos., Allstate Corp. and Chubb indicate that the trend now represents about $4.5 billion of the $149.5 billion auto insurance industry.
(The Wall Street Journal, 7/13/04)