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How are Auto Insurance Rates Made?

Brokers are often asked why insurance rates can change so drastically when the purchase a new car, or change their address. It can often be a significant difference, leading to many questions as why moving 10 minutes away has such an effect, or why is their friend paying less for the same car. I can understand why it appears so confusing, as how the prices are determined is not clearly demonstrated on your policy. To help you let's look at a few pieces of the puzzle and give you a general idea of what goes into what you pay, and some of the reasons why.

What Goes into Auto Insurance Ratings?

Let's start with the beginning on this, and what has the most impact on how much you pay for car insurance - the driver. We can illustrate the difference by comparing two drivers - John and Derek. John is an older gentleman, who has been retired for a few years with no accidents or tickets. He has been insured with the same company for over 20 years and always paid his insurance on time. Derek is a teenager who just passed his G2 exam a month ago. He has an accident on his record as well as a ticket. He uses the vehicle to drive 80 km to work everyday and continually pays his insurance late.

Now lets review how the driver affects the rating:

Age - Yes how old you are comes into play when insurance companies rate your policy. Most companies offer discounts for when you become a senior citizen, as most seniors have decades of driving experience. John is older than Derek, so he would most likely receive a better rate.

Use - How often you drive the car also plays a role in how much you pay. The more you drive, the more likely you are to get into an accident. John is retired so he most likely does not drive as often, and when he does he probably is not in any rush to get anywhere. Derek is working, which means he has no choice but to commute to work every morning. This puts him on the road more often, and at a higher risk of having an accident, which means his rates will be higher.

Experience - There is no substitute for years of driving experience. John has been on the road for thousands of hours during his lifetime, which is something that cannot be taught. Derek is still a new driver, so there will be many situations which are new and unfamiliar to him. Derek will pay more because he does not have the same experience as John.

Accidents/Tickets - Yes if you have an at fault accident or ticket(s) on your record your insurance will cost more. Tickets stay on your record for 3 years from the date you paid them - not the date you were convicted. Accidents are usually ratable for 10 years. John has no tickets or accidents so he will have a very good rating with the company, and receive discounts for his good driving habits. Derek already has an accident and a ticket on his record, meaning he may have to pay a surcharge or penalty on his insurance.

Payment History - This one does not directly affect the price of the policy but how the companies will allow you to pay. If you have payment issues, typically the company will only issue a policy when you have paid up front for it. This lump sum may be more than you can afford, which is why it is always important to pay on time. Missing payments will also usually incur an NSF fee, which can add to the cost.

I know this is a lot of information in a short area but we still have a few more considerations than just the driver. Let's now look at how location affects your insurance.

Location - Where you live matters to insurance companies. Living downtown Toronto will most likely mean your insurance will be higher than living out here in Bowmanville because the streets are much more congested. Anytime there are more cars on the road, it is more likely an accident will occur. Listening to the news in the morning, you constantly hear there are delays on the DVP or 401 - precisely because they are two of the busiest roads in the country.

Location also plays a significant role in your policy if you insure your car for fire/theft/vandalism etc. The more densely populated the area, the more likely your car will be stolen. If you live 20 km to the nearest neighbor or town, then there are not too many thieves that will venture to your home to steal your car - simply put it is not worth their time, unless you have a really nice car.

The Vehicle - The last important consideration is the car itself. Years ago cars used to be rated based on their value - which on the surface sounds like it makes sense - the more the car was worth, the more it cost the insurance company to replace. This has changed over the years to be based on statistics. Insurance companies have large databases on which cars are stolen most often, how often they are in accidents, and how severe the accidents were, including how much it cost for those accidents. Insurance companies today are not too concerned about replacing your car when you are in an accident as cars are relatively cheap compared to the cost of providing care if you are injured. Injury claims can be hundreds of thousands of dollars, which makes that $30,000 wrecked car seem insignificant in comparison to a personal injury claim. The data the insurance companies have confirms them which cars are most likely to have certain claims, and they rate those cars accordingly. Consequently certain cars may cost more to insure because many younger, inexperienced drivers purchase that car, or maybe they are not the safest car, which leads to accidents being more expensive.

If you would like more information or a quote, please give us a call 905-623-4406 and let one of our experienced brokers help you make the right choice for your auto insurance.

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