To understand how car insurance companies develop their car insurance quotes, the first thing that you need to understand is the concept of statistical risk assessment and how car insurance companies actually set their prices. Car insurance quotes are not pulled out of thin air or based on how much the insurance company likes or dislikes you. It is not even really based on a “lowest price wins” mentality, although many insurance companies do everything they can to keep their prices as low as possible. It is all based on statistical risk assessment.
What is statistical risk assessment? It is a number that is derived from an underwriter. To understand this concept, the role of an underwriter must first be understood. An underwriter wades through vast collections of data. Statistics on a huge number of various things are reviewed; nothing is left to chance. An underwriter looks at a person’s age, driving history, area, sex, type of car and marital status. These huge pools of data contain average numbers of accidents and claims based on all of the different factors. The underwriter sifts through these statistics and comes out with a car insurance quote based on the odds of a person having an accident or making a claim. This process is the statistical risk assessment spoken of earlier. The assessment of whether you will actually need to use the insurance is then applied to the amount of insurance coverage that you want. After that, any discounts like “safe driver” or “driver side airbags” are applied, and what you end up with is the final price.
This system works well, and it is fair. When a person pays more for insurance, it is because he or she falls into a group that, for one reason of another, is statistically more likely to get into accidents. Some of the assessed factors can be a person’s fault, such as having a bad driving record or history of accidents. Some of the factors can change over time, such as driver age. A few can be difficult to change without a significant effort on the person’s part, such as the area where he or she lives. Then, there are those factors that you can do nothing about, such as gender. All prices are not equal, but they are always based on statistics. An underwriter will never meet, see or even know any of the insurance company’s customers.
Statistical risk assessment is an impartial method to make sure everyone is treated fairly in the development of car insurance quotes. It ensures that the price setting process is based solely on objective, rather than subjective, criteria.