Good Time to Shop Around for Auto Insurance


Now is a great time to shop for auto insurance.

Along with the rest of the property/casualty insurance industry, the auto insurance industry is in a soft market. The nationwide average annual cost for auto insurance premiums in 2007 was expected to decrease for the first time since 1999, according to the Insurance Information Institute, a non-profit organization supported by the insurance industry. The institute attributes the more favorable conditions for consumers to a more competitive marketplace, safer cars and aggressive fraud-fighting that has reduced bogus claims.

Furthermore, if you're a do-it-yourselfer who likes shopping for insurance online, there's more good news. In June of this year, the Customer Respect Group released a study that found that auto insurer Web sites are improving. Most of the improvements cited stemmed from the sites' responsiveness to emails and their disclosure regarding personal data consumers must enter to get a quote. Both are steps in the right direction, so you should check out your online options.

The companies that performed the best in the study were GEICO, a subsidiary of Berkshire Hathaway; Progressive; Liberty Mutual; Farmers; American Family; and Cincinnati Insurance, a unit of Cincinnati Financial.

Whether you're shopping for coverage now or in the future, you should always understand what you're getting. This excerpt from Ratings' Consumer Guide to Auto Insurance (available for $49.95) walks you step-by-step through an auto policy and, more importantly, how insurers determine your premium.

Types of Coverage
At its core, auto insurance is simply a contract between you and your insurance company to protect against financial loss in the event that you have an accident. Depending on what type of coverage you purchase, the insurance can provide financial assistance to:

  • Repair your vehicle or replace it in the event it is damaged or stolen.
  • Reimburse others if you cause an accident that hurts them or their vehicle.
  • Pay for any medical expenses arising from injuries you or your passengers sustain in an accident.
    At a minimum, most states require you to have liability insurance coverage to protect others in case you are at fault in an accident. There are two primary kinds of liability coverage that you need:
  • Bodily Injury: This covers injuries you might cause to someone else. Most states stipulate a minimum amount of this coverage, although you can elect to purchase higher policy limits if you're willing to pay higher premiums. (See our Consumer Guide which shows your state's minimum required policy limits.)
  • Property Damage: This covers damage you might cause to someone else's property. Typically this will be damage done to another person's car, but it also covers any other object you hit, including buildings, fences, or street signs. Again, most states stipulate a minimum amount of this coverage per accident, with more coverage available at higher premiums.

Although purely optional for drivers in most states, some states also require two other types of coverage:

  • Medical Payments or Personal Injury Protection: This coverage provides assistance to treat injuries to you and your passengers, regardless of who is at fault in the accident. This type of coverage may also pay funeral expenses and lost wages in some circumstances. In the event that you have an accident that requires medical payments and you have this coverage, you will be required to pay a certain amount of the cost out of your own pocket, known as the deductible, and the insurance company will pay the remainder of the claim. The higher your deductible, the lower your premiums will be.
  • Under-Insured and Uninsured Motorist Coverage: This protects you, your passengers and your vehicle in case you have an accident with an uninsured driver, a hit-and-run driver or a driver with insufficient insurance coverage. This type of insurance also covers you and your family members as pedestrians, if you are injured by a hit-and-run driver.

Finally, there are two additional types of auto insurance to cover the cost of repairs to your car. These coverages are never required by the state, but if you have a loan or lease on your car, your lender will usually require both:

  • Collision: This insurance pays to repair damage to your car from a collision, regardless of who is at fault. (In the event that you are not at fault, your insurer will generally try to get the other party's insurance company to reimburse them for the damage to your vehicle.) Collision coverage usually has a deductible between $250 and $1,000 that you must pay toward the repairs before your insurer will pay its portion. As with Personal Injury Protection, or PIP, the higher your deductible, the lower your premiums will be.
  • Comprehensive: This insurance covers your car for everything that is not covered by collision insurance. This includes the cost to replace or repair your vehicle due to theft or damage from things like hail, water, flood, fire, wind, explosion, earthquake, animals or vandalism. This coverage also has a deductible, which is usually equal to or lower than the deductible on your collision insurance.

How Premiums Are Determined
Insurance companies take a wide range of factors into consideration when determining how much you will have to pay in premiums. These include:

  • Amount of coverage purchased: The higher the policy's maximum coverage limits, the higher your premium will be. You may be able to get away with the minimums required by your state, but go ahead and ask for pricing on higher limits before making that decision. Depending on the other factors listed below, you may be able to substantially increase your protection for a very modest increase in your premiums.
  • Amount of deductible: The deductible is the portion of the claim you must pay before the insurance company will pay the remainder. Deductibles typically range from $250 to $1,000. As you might expect, the higher the deductible, the lower your premium will be. (This applies to collision, comprehensive and personal injury protection.)
  • Type of Car: Next to the amount of coverage you purchase, the type of car you drive is the second most important factor in determining your premium. Due to the nature of their drivers, owning a sports car will usually drive up your insurance premium. Likewise, sport utility vehicles are usually more expensive to insure, while family sedans are usually less expensive to insure.
  • Driving history: The insurance company uses your driving record as an indication of the type of driver you are for determining how much risk they are accepting. Therefore, if you have a history of auto insurance claims or traffic violations, your insurer will consider you a higher risk driver and will raise your premium rate accordingly. Drivers with very poor records or a conviction for driving while under the influence of drugs or alcohol can even have difficulty finding an insurer who will cover them at all. If you fall into this category, you may have to turn to an Assigned Risk Plan -- offered by each state -- which assigns you to an insurer. The state will require that insurer to provide you with coverage, but will also allow them to charge you significantly higher rates.
  • Gender: Statistically speaking, men have more accidents than women. As such, men tend to be charged higher premiums.
  • Age: Statistics again indicate that younger and older drivers tend to be the riskiest. In fact, young drivers (between 15 and 20 years old) accounted for only 6.4 percent of all drivers in 2002 but accounted for 14 percent of all drivers involved in fatal crashes, according to the Insurance Information Institute. If you are a young driver, expect to pay higher premiums. This becomes less of a factor at age 21 and is removed as a factor at age 25, after which you'll enjoy many years before you grow old enough for your insurer to consider you high-risk once again. Premiums begin to creep up again for older drivers, as statistics support their riskier status. According to the National Highway Traffic Safety Administration, 15% of all people killed on the road in 2005 were 65 or older.
  • Marital status: Married people tend to have fewer accidents than single people, so you will likely see a discount in your premium if you are married.
  • Other drivers in your household: When determining your premium, your insurer will not only look at all of the above factors for you, it will also take these factors into consideration for everyone in your household (any other licensed drivers in your house must be disclosed on your application). That means a teenage son would bring your premium way up, but a spouse with a clean driving record would help bring the premium down.
  • Location: Insurers must get their premium rates approved in each state where they are licensed, leading to a variation in rates between states based on the insurer's claims history in the state. For example, drivers in Florida have more accidents than drivers in Wyoming, so Florida drivers pay higher premium rates -- even for the same insurer insuring the same driver and vehicle. And within Florida, there are some areas that have more accidents than others, e.g., highly urban areas like Miami, which lead to even higher rates for drivers located within those areas.
  • Vehicle usage: The more you drive, the more opportunity there is for you to be in an accident. Therefore, you'll find the premiums lower for your "weekend car" than for a car you use to drive 30 miles each way to work. The more you drive the vehicle, the higher the premiums will be.
  • Credit scores: Insurance companies have recently started using credit scores as a predictor of future claims activity. There has been much debate about the validity of this factor, but research, including a 2003 study by EPIC Actuaries, that show a correlation between credit scores and claims activity. The law does not allow an insurer to use your credit history as the sole factor in determining your premiums.
    Your credit score can, however, be used against you to decline coverage or as one of several factors used to set your premium. Not all companies use credit scores, so if your credit history is particularly bad, it is all the more important that you shop around for an auto policy from an insurer that does not use credit scores as a factor in setting its premiums. This could easily save you hundreds of dollars per year.

Although these are the basic factors that every insurance company uses in setting its premiums, the amount you pay will still vary from company to company, based upon each insurer's process of assessing your risk and pricing your policy accordingly. Some insurance companies weigh some factors more heavily than others.

Also, some insurers charge a flat fee for your liability coverage, regardless of the vehicle you drive, while others base your premium for liability coverage on the type of vehicle.

For these reasons, we strongly encourage you to comparison shop for your auto insurance policy. The Consumer Guide contains a detailed table showing the extent to which premiums can vary from company to company and area to area for the same person insuring the same vehicles.

So if you are interested in saving money, it definitely pays to shop around and look at multiple insurers regardless of whether you're buying a new policy or renewing an existing one.


Show Comments

Back to Top