Why and How Are Policies Priced for Different Drivers?

Drivers are grouped according to the level of risk each one poses—i.e., the amount of loss incurred by insurers within various categories of policyholders. For various reasons, drivers are categorized by:

• Gender. Men have more accidents on the road than women.
• Age. Drivers under 25 (and, for some insurers, under 30) are considered at higher risk of having an accident.
• Marital Status. Married drivers tend to have fewer accidents than single drivers.
• Personal Driving Record. Years of driving experience, accidents, speeding tickets and driving while under the influence offenses are all factors in determining how much of a risk you pose as a motorist.
• How You Use Your Vehicle. The value, size, weight, age of your vehicle —even the cost of replacement parts— are essential to determining the price of your insurance. Larger, heavier vehicles are considered at lower risk than smaller, lighter ones. Plus, more expensive cars are costlier to have repaired than economy models.

The cost of your insurance policy is based on the average cost of covering actual losses, spread out over your particular "rating group" as a whole. Of course, you may never have an accident or have your car stolen, and therefore will never need to be compensated. But others in your category may not be so lucky. Your premium will help to pay for yours. In other words, you are investing a little today in case you need a lot tomorrow. Your investment is pooled with others, and the pool pays for your losses.

For example, if you are a 23-year-old man and you park your new sports car on a downtown street in a large city, you will likely pay more for insurance than a 37-year-old woman who parks her four-wheel-drive in the suburbs, simply because—based on average losses—you have a greater chance of having an accident or being the victim of auto theft.