Understanding the balancing act of the insurance pricer
Getting car insurance is usually pretty simple.
Key in a bunch of information about you and your car. Make some decisions about coverage options. Within a few minutes, voila, you have a dollar figure staring you in the face.
So, just where did that dollar figure come from?
Pricing insurance—whether it’s to cover property, health or life—is actually a very refined science.
With science, we use a body of knowledge (theories), based on observation, to predict how things will happen now and in the future. Insurance is the same. Broadly, an insurance company uses information gathered from its history of adjusting claims to predict the likelihood that an individual will have a claim in the future. Each person pays a premium based on that likelihood.
As product development manager, Progressive’s Mike Doerfler spends his days understanding that information, and helping the company make those predictions. I asked Mike to explain to me—in a way this non-scientist could understand—how we calculate insurance rates for cars, and why some cost more than others to insure.
This is what he told me:
It starts with four basic rating factors
Broadly, we look at four factors for each vehicle model.
- The likelihood that the vehicle will be stolen or vandalized.
- The cost to repair the vehicle after a collision.
- The amount of injury or damage the vehicle can cause to another person or their property in an accident.
- The likelihood that people inside the vehicle will be injured in an accident.
We get hard data for these factors from actual claims. So, if we pay more in repair claims for a particular model, factor 2 would contribute to a higher rate. If we pay less in injury claims for a particular model, factors 3 and 4 would contribute to a lower rate.
It gets more complex as we look at all of the factors together
Then, it gets more complex. A lighter car might not do as well as a heavier car when it comes to protecting the driver in an accident. We’d pay more in injury claims for the lighter car—and that would contribute to a higher rate.
But, a lighter car with significant safety features would protect the driver better. And that would contribute to a lower rate for the lighter car. Then again, a car with more safety features generally costs more to repair. And, that would contribute to a higher rate.
For instance, a car built with a lane departure warning system might keep you safer by helping prevent accidents. But, those technologies are expensive to repair and replace if damaged. So, the insurance rate has to balance the added safety that comes with the system with the cost to repair it if it’s damaged in an accident.
“Yes, it’s really a balancing act,” said Mike. “When comparing vehicles, we can’t just focus on a single factor. We look at the four factors combined, and consider all the things that affect these factors.”
The only way to really be confident
When car shopping, there’s really only one good way to understand the cost of insurance. Get quotes for each of the vehicles you’re considering.
An independent insurance agent can do this for you quickly, and for free. Or, check out our Ways to Save page at progressive.com and run quotes for each vehicle. Try to have the vehicle identification number handy, and be sure you at least know the year, make and model.
Auto insurance may seem complicated—even mysterious. But a basic understanding of the key concepts is within anyone’s reach, and can make you a smarter and more confident consumer.