Why did my rate increase?

I saw this question come up on twitter today.  It's not an unusual one:

@SaraMorrison: "Why did my car insurance go up when I haven't had any accidents or tickets and my car has only gotten less valuable?"

There's a few reason for this.  First, it's important to remember what insurance is at a very basic level.  The simplest definition I can give is insurance is a transfer or risk.  Ok, so where does it transfer from and who does it transfer to?  In @SaraMorrison's case, she's in California.  When you enter into an insurance contract in California, this is the deal you make with the company.  I'm going to pay company X for insurance, and in exchange for my money, if I cause an accident the company will pay for the damage that I've done to the other party, at a minimum of $35,000.  Not only will they pay the $35k, but if I'm actually sued they'll pay the legal fees to defend me as well.  In most insurance policies the amount of liability coverage you have is far greater that the $35k, putting even more of a burden on the insurance company than this example.

So how can the insurance company afford to potential pay the $35k?  They're looking at drivers that share similar characteristics and with great accuracy, predicting the probable cost of a future claim.  Are you a married female in your 30's with a mini-van in suburbia?  Great, you're going to get a super low rate.  Why? Because most married females in their 30's with a mini-van parked in the 'burbs cause very few accidents.  So that class of drivers pays less then most other.

The trick to finding a low rate for insurance, regardless of the class you're in, is to find the insurance company that has a favorable loss ratio for your class.  This is why companies charge different rates for the same person.  If Company X insures 1000 corvettes and 900 of them have filed a claim, then regardless of everything you have going for yourself, if you drive a Corvette you're going to pay more with Company X.  I think that covers us for class.

On to part B, why does your insurance rate not go down with the value of your car?  You have to remember that the reason insurance is required, and why you should buy it even if it wasn't the law, is because of the liability coverage.  Liability is the coverage that pays for the damage you cause to the other driver.  The cost for the insurance company to provide you with liability is not impacted by the value of your car.  What does impact the cost of your insurance based on car value is the comprehensive and collision coverages. 

This is where it gets tricky.  First, the easy part.  Most accidents do not result in a total loss.  So almost never is the insurance company going to pay a $20,000 collision claim on a $20,000 vehicle.  Because of this, it doesn't matter if i'm driving a $60,000 Escalade or a $15,000 Focus chances are the company is never going to come close to paying for a total loss.  But, if both of these cars are involved in a fender bender, the labor rate is the same.  You're only looking at a minor difference in the cost of parts.

The second part of this equation goes back to our conversation on rating classes.  There is a good possibility that the collision coverage on a vehicle will go up when the vehicle is 2-6 years old vs. if it is brand new.  The reason for this, is the majority of younger drivers that cause most accidents, are not out driving brand new cars.  They simply can't afford to.  So the class of driver that's driving a brand new car, is somebody a bit older and higher up on the socio-economic ladder.  All those new cars are experiencing very few losses because the drivers are much better.  But, once the car depreciates in value and becomes more affordable to a younger, riskier class of driver, the frequency of accidents and cost to settle claims on the car go up.

So which vehicles are the least inexpensive to insure?  It's going to vary by company, but a good way to figure this out is take a poll of high school students.  Ask them which cars they would like drive.  Next, go pick out any car not on their list.

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