Rating Variables: What They Are and Why They Matter
Auto Insurance Ratings Variables
When it comes to automobile insurance, a lot of factors go into determining an individual’s premium. These factors are referred to in the insurance industry as rating variables. Recently, some debate and even legal questions have surfaced as to the use of these factors. However, rating variables impact the cost of auto insurance for every driver. Let’s look at how they’re used and how they actually play a role in keeping insurance costs down.
The Insurance Information Institute (III) defines rating variables as “the characteristics of individual policyholders that can help approximate the cost of their risks.” Variables used include make and model of car, gender, age, and driving history. These factors work to create a risk profile that helps determine a policy rate. Therefore, some variables can help cut your costs and premiums down, whereas other variables may require heftier payments. To keep these variables as fair and accurate as possible, statistical data that is credible and homogeneous is used. Industry standards demand that this data is also both objective and verifiable.
This is not a new idea. Actuaries (those who work to determine individual risks and set insurance policies) have been using rating variables for decades and these variables are already regulated by each state. However, certain variables have been questioned lately and specific legislation passed to regulate the use of these ratings.
Insurance professionals believe the legal ramifications of legislation against variables such as gender will ultimately affect the consumer because insurers may not be able to price individual policies as effectively. The III gives the example of higher policy rates for males who drive pickup trucks. In statistical data, this combination of automobile and gender has shown to be a higher risk for claims. In the event that gender is removed from the variable pool, the actuary will most likely use a proxy of pickup drivers as a way to determine risk. This means that everyone who drives a pickup truck is now put into the high-risk category for the proxy variable without the statistical use of gender as a determining factor.
The same thing goes for truck drivers looking for insurance — their vehicle is much bigger than standard cars and can cause more damage. This means that quotes for truckers can be triple that of car insurance quotes.
Contrary to what it may seem, the increased use of rating variables has actually helped lower policy costs for high-risk drivers. In the past, many high-risk drivers were not able to purchase insurance from a private market due to their risk factors. Instead, high-risk drivers had to purchase insurance from an “assigned risk pool.” These pools are often state-supported and offer higher premiums with less coverage. The III reports that in the past fifteen years the number of drivers in an “assigned risk pool” has dropped nearly 90% as insurers have been able to more accurately predict rates and broaden coverage.
As the insurance industry continues to expand its use of data to improve consumer rates and experiences, rating variables will play a critical role. These factors give a more accurate picture of individual drivers and allow fair policy rates for drivers both at a higher and lower risk.
If you have questions about your auto insurance rate or would like a quote, contact Fudge Insurance. Our agents have served clients across the globe for nearly two decades. As an independent insurance agency, we’re able to work with dozens of insurers to personalize a policy that fits best for you.
