how do car insurance companies assess risk
All insurance companies employ groups of mathematicians called actuaries who collect information about traffic accidents from all around the US and calculate the probability of accidents. So now you know who to blame when those quotes come in. There are rankings for all the different makes and models of vehicles. There is a probability calculated for a traffic accident or vehicle theft for every zip code in the country. Actuaries have made a science out of guessing who will make a claim. If you fall into a set of classes more at risk, your premiums will be higher. If you are lucky, your premium will be lower.
Starting with the zip code lottery, California is one of the few states to have forced the insurance companies to reduce the importance of the zip code factor. For most everyone else, where you live sets the tone for the whole calculation. It starts with the distance you have to travel to work, how many times you take the children to school through heavy traffic, how far the fire truck has to come to put out the flames in the burning garage, and so on. There are numbers for every possible way in which you might damage or lose your car based on where you live.
Then these number-crunchers turn their attention to you. Everyone has to learn driving and, before you build up experience, you are more likely to be involved in accidents. Then they start looking at whether you have good grades at school (straight A students drive more carefully), how good your credit record is (people responsible with their money drive more carefully), what job you have (which may involve driving and the more miles a year you drive, the greater the risk of an accident). Again, there are statistical measures for every type of person and all the different ways of passing the time - even hobbies and pastimes are relevant. Some good does come out of this because there are a few niche companies specializing in groups who share the same characteristics. Trade unions, trade associations and other people sharing the same job or interests can save by buying into group cover. Even young drivers can save by buying a policy with a specialist insurer.
Then there are the vehicles. Even the color is taken into account when it comes to deciding which are more likely to be involved in accidents or to drive away when you are not looking. Science is a wonderful thing, allowing insurance companies to anticipate which vehicles will be chosen by those who like to drive fast and/or to attract members of the opposite sex.
The moral of this story could not be more simple. To get the best rates, live somewhere very quiet, have years of experience and own a car that no-one else would ever want to steal or race against when pulling away from stoplights.
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Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment.
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