Understanding Auto Insurance

Just what is insurance?

It’s the easiest thing in the world to explain but the hardest thing in the world to live with (and without). It all started with the merchants hundreds of years ago. They all feared losing their goods in transit so they all paid into a percentage of the value of each cargo into a common fund and, if anyone lost a cargo, they could recover the value from the fund. This seemed like a good idea so it gradually spread into the monster we have today. In simple terms, insurance is a legalized form of gambling. The insurance companies create groups of people sharing the same risk, e.g. everyone with a vehicle for personal transport. All the vehicle owners then make a contract with the insurer. They pay a premium. Think of this as like a bet. If you are lucky, there’s no accident, you suffer no loss and you lose your stake. But if you have an accident, you get the amount you have lost up to a contract maximum.

Obviously, no one in the insurance industry likes this called a form of gambling. It makes them look bad. So instead of talking about betting, odds and the house edge, they talk about assessing the risk and calculating the premium so that, when everyone pays into the group auto insurance fund, there’s enough to cover all the loses and leave the insurance company with a profit.

How do the insurance companies calculate the risk?

The auto insurance companies employ people called actuaries. They are statisticians who collect information about every traffic accident within the US. That’s everything reported to the police and ambulance services, or claimed on insurance policies. They can tell you how many times a car driven by a thirty-three year old woman has hit a tree in snowy conditions in California at 4 a.m. and what the color of the cars were. They are like people who follow race horses. They can tell you the probability of any make and model of vehicle having an accident. It’s the same with the drivers who are ranked by age, sex, experience, ZIP code, occupation, and so on. They set the premium ranking both horses and riders.

What are the premium rates?

These are general headings for each make and model of vehicle, adjusted by the individual qualities of the driver. So, the insurer starts with a ballpark figure and then moves it up or down depending on your age, experience, where you live and how far you will drive each year. If you are a safe driver in a car with a low accident rating, you will pay a low premium. If you are a young driver with tickets for speeding hoping to insure a high-powered car, you will be asked to pay a small fortune. That’s why it can be hard to live them. It would be better if they were not for-profit. Except, this is US capitalism and you must pay for your privilege of driving a vehicle on the road.