Understand What “Risk” Means to Auto Insurers

Just as there are many types of vehicles on the roadways, there also are a variety of drivers behind wheels. And how insurers perceive drivers plays a major role in determining what those drivers pay for auto insurance.

What does an auto insurer consider when determining drivers’ policies and rates? In a nutshell, risk. Insurance carriers put drivers into one of three categories — preferred, standard, or high risk — based on their risk assessments. Preferred-risk drivers get the best rates, high-risk drivers pay the highest rates, and standard-risk drivers fall somewhere in the middle. While definitions for each category and the formulas used to classify drivers vary by state and insurance company, some common factors considered for classification include:

• Age — The preferred-risk category is generally reserved for drivers older than 25. Drivers ages 16 to 25 are often considered high-risk.
• Driving record — Preferred-risk drivers have squeaky-clean driving records with no tickets and minimal not-at-fault claims. Standard-risk drivers have only one or two minor traffic violations and no more than one at-fault accident. High-risk drivers include those with major traffic violations or a combination of at-fault accidents and traffic tickets.
• Prior insurance coverage — Insurance companies care about drivers’ industry histories. Preferred-risk drivers have not only had insurance history for the past six months but their liability limits on prior policies were 100,000/300,000 or higher. This means if a driver causes an accident, liability insurance pays up to $100,000 per person but not more than $300,000 per accident. Standard-risk drivers also have six months of prior coverage but may have minimal liability coverage, which insurance companies view more negatively. Those with no insurance coverage for the six months prior are considered high-risk.
• Credit score — Many insurance companies evaluate drivers’ credit scores and tie them to their driver risk assessments. Why? Insurers see a correlation between credit scores and the likelihood drivers will file auto insurance claims. Higher credit scores are generally associated with standard- and preferred-risk drivers while poor credit scores can signal “high risk” to insurers.

What exactly matters on a driver’s record?

Since “good driver” is a very subjective term, insurance companies often use Motor Vehicle Reports (MVRs) to more closely analyze drivers’ histories. MVRs are snapshots of drivers’ traffic violation histories, including traffic citations, accident reports, vehicular crimes, driving under the influence (DUI) convictions, and record of points in states that use points systems. They also include information about drivers’ license statuses, like suspensions and revocations, as well as any special endorsements or restrictions.

Generally speaking, insurers look at the most recent five years of activity on MVRs, but this varies by state and insurance company. Also, infractions like DUIs may stay on MVRs longer.

It’s a good idea to obtain a copy of your MVR before shopping for insurance. This lets you know what potential carriers will see on your record and gives you a chance to correct any inaccuracies before obtaining insurance quotes.

Are there specific things drivers can do for better auto insurance rates?

There are a few ways drivers can boost their “good driver” images in hopes of lowering their auto insurance rates. For younger drivers, typically those under 21, driver education courses can translate to insurance discounts with many providers. For more experienced drivers, a “defensive driving discount” may be available for successfully completing a defensive driving course that often covers traffic laws, driving in adverse weather, drug and alcohol awareness, and specific defensive-driving techniques. Discounts vary by state and insurance company. And in some cases, just being a consistently good driver over time without accidents or violations can garner a “safe driver discount” from many providers.

Lastly, if you live in a state that requires periodic vehicle inspections at licensed stations, comply with the rules to avoid a ticket and related fines. In states that use vehicle inspection stickers that change color each year, it’s easy for an enforcement officer to spot a vehicle with a missing or expired inspection. What an inspector looks at depends on state requirements, but a standard checklist may include seatbelts, brakes, steering, tires, spare tire, lights, mirrors, windshields, wipers, and horn.

Driving truly is a privilege. Auto insurers reward drivers who consistently demonstrate low-risk behavior and good choices both behind the wheel and in their daily lives. Understanding what matters to insurers when determining auto rates is the first step to getting the best policy for your situation. An experienced insurance agent can help unravel the complexities of auto insurance laws and discounts that often change from state to state.