I am asked this question on a regular basis – “Why do my insurance rates change?”. Or, “My rate increased and I haven’t had any losses, why? Am I paying for other’s losses?” The answer, quite simply, is “YES“!
Did I capture you attention with that last one? I hope so, because it is true – the very basis of insurance dating back to the early days of the first insurance policies and one of the core baselines in setting insurance premiums is the “law of large numbers”.
Insurance companies use the “Law of Large Numbers” and probability to determine the chance of an event occurring. If the chance of someone having a car accident is one in one hundred, then insurance companies collect premiums from 100 people to pay the claim that one driver will incur.
This is called “spreading the risk”. The Law of Large Numbers means the larger the number of risks (e.g. cars or homes etc.) that an insurance company insures the closer they will be able to predict the actual results of the chance of an accident occurring. Of course it is still up to chance but past experience is a good indicator of the future.
That said, not everyone in the same “risk pool” pays the same premium. This is because insurers “segment” their pools of risks by many different factors. These factors vary by type of insurance coverage (i.e. Home, Auto, etc..), and of course level of coverage selected.
So, now that I have you thoroughly depressed and thinking it is all out of your control – Here are 3 things that you can control that will help maintain the best possible rate:
1) Claims – Insurers will review your claims experience prior to every policy renewal. If you have not had any, you will likely receive credit for that. If you have, this will also be taken into account.
Obviously there will be things that happen that you cannot control 100% (i.e. – hail storm, or a giant soccer ball falling on your car) – this what insurance is for. However, if you use your policy routinely, you can expect to pay higher premiums over time.
2) Credit – Yes, 99% of insurers use some sort of credit history data to establish rate level. Anything you can do to maintain on time bill paying habits without judgments, delinquencies, etc – will make a big difference in the premiums you pay.
3) Driving Record – by not having moving violations and accidents you will reward yourself with good driver type rate discounts. If you have young teenage drivers, we offer a Good Student discount of they maintain at least a 3.0 (B average) GPA.
Hopefully you have picked up at least one thing from this issue that you can use to help you with your own insurance situation. Your comments are welcomed – thank you!
Until next time – be safe, be happy, and stay connected!