Reader’s Question:

How do auto insurance companies connect an accident and insurance premiums? Is there some sort of formula that they use to come up with a premium computation?

Bobby

Houston, TX

Getting into an accident and insurance premiums are definitely connected. All insurance companies work by making a bet: they bet that the payments of their insured clients will out-weight the costs of paying for accidents or similar misfortunes that the company insures. Now if you get into an accident, they’ll have to keep their end of the bargain and pay according to the terms written down in the contract. If you had an accident and you were at fault, they’d end up risking more by keeping you as an insured client. So to even out the odds that they’ll still earn money from you, they’ll raise your premium.

Now each insurance company has its own formula for computing a premium. Although most of the factors for computing a client’s premium are confidential, there is one factor about you that will have the greatest effect on the price of your premium: your driving history (or a lack of it.)

Defensive-driving classes, years of accident-free driving, your frequency of driving and driving accidents are just some parts that would determine your driving history. If your insurance company sees that you’ve been driving safely, conservatively, and sparingly, you can argue for lower insurance premiums.

Just think up ways to ensure that the insurance company won’t lose out on their ‘bet’ by lowering your insurance premium, and you’ll be able to get a discount when they make the computations for your premium.