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How do insurance companies come up with auto premiums?

[vc_row][vc_column][vc_column_text]My Uncle sent me an article to read regarding the complexity of auto insurance rates and I thought it was a good read.  For those who want to read it here it is. It is a good article and I totally agree that pricing has gotten overly complex.

The insurance companies are dying to figure out the proper rate to charge. One of the first things I learned when I became an agent was that the company that charges the right price, wins. It’s an impossible science though. We live in the age of big data where we can boil down every statistic imaginable and we are using that to try and price things properly.

For example, insurance companies will take every car, and look at every accident that car was involved in and take the average on what was paid out. But they have to look at what was paid out on the liability side (who was hurt outside the car), they look at how much medical we paid out for those inside the car, and how much the car cost to fix. AND how much damage did it cause to the other car? Then they look at age and gender of the driver and they put all this in a massive blender and figure out a base rate.


They also use “insurance scores” which is a form of a credit score which can drastically affect the rate. They found out that people with higher credit scores file fewer claims. It is a statistical fact. Driving records and claims records are included in the mix as is your age.

That is the best way I can explain how rates are generated. Most people would agree that that would make sense. BUT, there are times I have had a rate for a client go haywire because we are adding an underage driver and the rate triples. I call and ask why and they cant really give me a clear answer. Essentially they tell me, “that’s what the computer is telling us”. I hate that answer.

The other thing I don’t like, is that we’ve gotten away from being able to tell clients how much a discount is.  There are about 8-10 different discounts that can be applied to your rate as well including, a prior insurance discount, what your current limits are, how you pay, what other lines of insurance you have with the company, good student discount, early shopping discount to name a few.We used to be able to say the auto home discount is 15%. Now it is this range from 12-22%.

I have heard that Farmers is going to fix that thought and go back to static discounts. I think it’s ok to try and use all of this data to predict rates, we just need to find a way to explain to the general public how we do it. I also have equated it to working on an engine. You could open the hood on your 1970 Cultas and know everything about the engine. Where the carburetor was and where all the head gaskets are… But on a new Oldsmobile, wait, bad example. On a new Cadillac, you probably couldn’t even change the oil. Insurance rating systems are the new Cadillac.


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