How do California Car Insurance Companies calculate Risk?

Posted on: 15Jan,2016

For California car insurance companies, the amount of the insured individual’s premium is normally done by calculating the risk factor involved with each driver. This methodology is commonly referred to as risk assessment and it involves studying hundreds or thousands of statistics that help them determine who is a high-risk driver and who is not. Needless to say, they will invest millions every year in the determination of this factor.

The Role of Risk Assessment Software

For instance, there are certain software applications that enable insurance underwriters to calculate pre-set algorithms which help them to determine how much of a risk exists where filing a claim against your policy is concerned. The algorithms on you and certain indicators and then compared to a set of data that weighs the amount of risk involved in insuring you. Additionally, when insurance underwriters are performing risk assessment, they will balance the potential for you filing a claim against the company’s profitability.

There are a number of risk analysis companies that insurance companies turn to when assessing client risk. They contain detailed sets of data that help insurance companies to categorize potential customers in predictive behavior groups (i.e. high-risk or low-risk). As a result, software vendors can pull certain data from a variety of sources to calculate their decisions regarding an individual’s creditworthiness along with the risk assessment of different audience subcategories.

Factors involved in Risk Assessment

The process of risk assessment involves numerous factors and hundreds of thousands of statistics. Fortunately, every driver on the road today has control over some of the risks involved. This gives you a partial say in the price you pay for your premium. The following is a list of the determination factors that insurance companies typically use:

• Age – the younger your age, the higher your premium. Until you reach 25 years of age, you will be categorized as a high-risk driver.

• Credit rating – the lower your credit score, the more you are likely to pay for your insurance premium.

• Driving record – a clean driving record helps you save money on your insurance premium. On the other hand, if your driving record is scarred by accidents and moving violations, you can expect to pay a lot more.

• Gender – female drivers typically pay less for their premiums than males because they are less risky to insure.

• Geographic location – city residents usually pay more for their insurance while rural drivers typically pay less. The theory is that more people equates to more accidents, theft, and vandalism.

• Make, model, and year of the vehicle – newer, fancier vehicles cost more to insure. However, if the vehicle is equipped with certain safety features such as air bags, anti-lock brakes, anti-theft devices, and automatic seat belts, your premium will be less.

• Marital status – unless any of the other factors on this list are negative, you will usually get a better premium rate if you are married. So, the risk of you getting in an accident drops significantly.

• Occupation – if your home is your work base, there is a greater likelihood that you will not get into an accident. This could qualify you for a discount since you commute fewer miles per year.

• Paying your monthly bills on time – when you make your monthly payments on time, the insurance company sees you as being financially responsible and categorizes you as a lower risk driver. This helps to lower your premium rates.

If there are other criteria or factors involved that are likely going to result in the insurance company paying out more money for claims, these will be taken into account and will most likely cause your premium to increase. For instance, smoking is classified as high-risk behavior because it increases the risk of being hospitalized. That is why health and life insurance companies charge smokers more for insurance than non-smokers.

Additional factors that may be considered

Men engage in bad driving behavior more than women such as driving while intoxicated, not wearing a seat belt, and reckless driving. Additionally, crashes involving female drivers tend to be less severe than accidents involving male drivers. This explains why the highest risk group of drivers is young males less than 25 years of age and that they pay more for their insurance premiums than any other group of drivers.