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Inside this Article
Car
Insurance - Basis
of premium charges
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Depending on the jurisdiction, the insurance
premium can be either mandated by the government
or determined by the insurance company in
accordance to a framework of regulations set by the
government.
Often, the insurer will have more freedom to set
the price on physical damage coverages than on
mandatory liability coverages.
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When the premium is not mandated by the
government, it is usually derived from the
calculations of an actuary based on statistical data.
The premium can vary depending on many factors
that are believed to have an impact on the expected
cost of future claims.
Those factors can include the car characteristics
The coverage selected (deductible, limit, covered
perils), the profile of the driver (age, gender,
driving history) and the usage of the car (commute to
work or not, predicted annual distance driven).
Gender
Men average more miles driven per year than women
do, and have a proportionally higher accident
involvement at all ages. Insurance companies
cite women's lower accident involvement in keeping the
youth surcharge lower for young women drivers than for
their male counterparts but adult rates are generally
unisex. Reference to the lower rate for young women as
"the women's discount" has caused confusion
that was evident in news reports on a recently
defeated EC proposal to make it illegal to consider
gender in assessing insurance premiums. Ending
the discount would have made no difference to most
women's premiums.
Age
Teenage drivers who have no driving record will
have higher car insurance premiums. However
young drivers are often offered discounts if they
undertake further driver training on recognized
courses, such as the Pass Plus scheme in the UK. In
the U.S. many insurers offer a good grade discount to
students with a good academic record and resident
student discounts to those who live away from home.
Generally insurance premiums tend to become
lower at the age of 25. Senior drivers are often
eligible for retirement discounts reflecting lower
average miles driven by this age group.
Distance
Some car insurance plans do not
differentiate in regard to how much the car is used.
However, methods of differentiation would include:
Reasonable
estimation
Several car insurance plans rely on a
reasonable estimation of the average annual distance
expected to be driven which is provided by the
insured. This discount benefits drivers who drive
their cars infrequently but has no actuarial value
since it is unverified.
Odometer-based
systems
Cents Per Mile Now (1986) advocates classified
odometer-mile rates. After the company's risk factors
have been applied and the customer has accepted the
per-mile rate offered, customers buy prepaid miles of
insurance protection as needed, like buying gallons of
gasoline. Insurance automatically ends when the
odometer limit (recorded on the car’s insurance ID
card) is reached unless more miles are bought.
Customers keep track of miles on their own odometer to
know when to buy more. The company does no
after-the-fact billing of the customer, and the
customer doesn't have to estimate a "future
annual mileage" figure for the company to obtain
a discount. In the event of a traffic stop, an officer
could easily verify that the insurance is current by
comparing the figure on the insurance card to that on
the odometer.
Critics point out the possibility of cheating the
system by odometer tampering. Although the newer
electronic odometers are difficult to roll back, they
can still be defeated by disconnecting the odometer
wires and reconnecting them later. However, as the
Cents Per Mile Now website points out: "As a
practical matter, resetting odometers requires
equipment plus expertise that makes stealing insurance
risky and uneconomical. For example, in order to steal
20,000 miles of continuous protection while paying for
only the 2,000 miles from 35,000 miles to 37,000 miles
on the odometer, the resetting would have to be done
at least nine times to keep the odometer reading
within the narrow 2,000-mile covered range. There are
also powerful legal deterrents to this way of stealing
insurance protection. Odometers have always served as
the measuring device for resale value, rental and
leasing charges, warranty limits, mechanical breakdown
insurance, and cents-per-mile tax deductions or
reimbursements for business or government travel.
Odometer tampering—detected during claim
processing—voids the insurance and, under
decades-old state and federal law, is punishable by
heavy fines and jail."
Under the cents-per-mile system, rewards for
driving less are delivered automatically without need
for administratively cumbersome and costly technology.
Uniform per-mile exposure measurement for the first
time provides the basis for statistically valid rate
classes. Insurer premium income automatically keeps
pace with increases or decreases in driving activity,
cutting back on resulting insurer demand for rate
increases and preventing today's windfalls to insurers
when decreased driving activity lowers costs but not
premiums.
GPS-based
system
In 1998, Progressive Insurance started a pilot
program in Texas in which volunteers installed a
GPS-based technology called Autograph in exchange for
a discount. The device tracked their driving behavior
and reported the results via cellular phone to the
company. Policyholders were reportedly more upset
about having to pay for the expensive device than they
were over privacy concerns. In 1996, Progressive filed
for and obtained a US patent (US patent 5,797134) on
their process. Progressive has also filed
corresponding patent applications in Europe and Japan.
UK auto insurer, Norwich Union, has obtained an
exclusive license to Progressive's European patent
application. They have recently completed a successful
pilot test of the technology and it is now available
commercially under the trade name "Pay As You
Drive"
OBDII-based
system
In 2004, Progressive launched another pilot program
to allow policyholders to earn a discount on their
premiums by consenting to use its Trip Sense device.
Trip Sense connects to a car's Onboard Diagnostic (OBD-II)
port, which exists in all cars built after 1996. The
discount is forfeited if the device is disconnected
for a significant amount of time.
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