What’s In An Insurance Rate?

Insurance may not be as inevitable as death and taxes, but it certainly ranks right up there with things we need to take seriously. Uninsured homeowners and drivers don't just put others at risk, but they may also find themselves at a complete loss when disaster strikes.The science of how insurance rates are established may seem like a mystery to the outsider, but insurance companies actually rely on a rather simple and straightforward set of factors to determine rates.“There are a lot of misconceptions and confusion about how insurance rates are calculated,” says B.J. Donaldson, CPCU, Vice President of Underwriting for Texas Farm Bureau Insurance. “In general, whether it’s a policy for the home or auto, the basic rates are arrived at the same way. In any line of insurance, the rates an insurance company charges are affected by the overall claims experienced for that line of business. That’s the bottom line, and then other factors are entered into that.”Here are a few factors that affect both home and automobile insurance rates.You Auto KnowThe state of Texas has required drivers to be insured since 1981, and in 2005 the state passed Senate Bill 1670 to reduce the rate of uninsured drivers. However, for many consumers, auto insurance is wrapped in mystery — and mythology.“Some of the biggest misconceptions we hear are around auto insurance,” Donaldson says, adding that many factors that consumers think will affect the price of their rates actually have no impact whatsoever.“Over the years, the thing we’ve probably heard the most is that the more expensive the car, the more it costs to insure.”He says the purchase price of a car doesn’t affect insurance rates nearly as much as the cost to repair the car.“In fact, some mid-priced cars cost more to insure than higher-end cars because they have a higher loss history or they cost more to repair,” Donaldson explains. “The only way to really know if it’s going to cost more to insure is to check with your insurance agent and get a quote on the premium of each car.”Two other things that consumers often incorrectly believe will affect their premiums are the color of the car and getting tickets. Contrary to rumor, red cars do not cost any more to insure than blue, white, black, or gray ones. And if tickets are minor, and you have an otherwise clean accident record, they may not significantly affect the price of your premium.So now that we’ve eliminated the things that won’t affect your premium — what kinds of things will raise your insurance rates?“There are several things we look at to determine auto rates — some makes and models generally have more claims, and that affects how the rates are established,” Donaldson says. To avoid surprises, check with an insurance agent before buying a car and find out what kind of premium you can expect to pay.Other factors that have a direct effect on rates are:Safety features of the carAge/sex of the driver (younger males will pay more)Use of the vehicle — is it used in a daily commute to and from work, or does it only go out on the weekends?Where it is garaged/used (metro-area drivers will generally pay more than those in rural areas)“All of these elements go into a rate,” Donaldson says. “We take a base rate, which is typically determined by the company’s experience with claims in that area, and then start adding in all these elements. That fills in the final number for us.”However, there are ways to bring that number down — he recommends asking for discounts, such as the Companion Discount for carrying both home and auto policies with Texas Farm Bureau Insurance and the Good Student Discount, which is offered to underage drivers who maintain certain grades in school.“Always ask your insurance agent how you can save more,” he advises.Home Is Where Your Stuff IsSome of the factors that influence home insurance premiums include geography and the type of materials used for building your home. Homes built from more fire-resistant items like brick, concrete, and stone will be less expensive to insure than those built from more flammable materials like wood. But your geographic location in the state factors in as well.“Certain parts of the state traditionally have more wind and hail claims just because of the way that weather patterns occur,” he says, adding that wind and hail rate as the top reasons homeowners file insurance claims. Geographic considerations also include living in an area with a high concentration of crime, where claims might be more likely to occur.“It’s really that simple. The company’s own experience in that area figures into the base rate that they set.”Mother Nature’s fickle decisions and the luck of the draw can play a role in premiums as well. If an insurance company has a heavy concentration of customers in a certain area that is affected by a catastrophe such as a tornado or other natural disaster, the customers may see a hike in their rates.“Any company has to cover its loss cost, including expenses, to continue to provide a quality product and service,” Donaldson says. “But from our perspective, we work very hard to make up for it in other ways so members don’t have to help bear all the burden of the company’s losses. We focus on things we can do to keep rates as low as possible.”What goes into an auto rate?The safety features of the car.The age and sex of the person driving the car.The way the car will be used (daily commutes or weekends only).Where the car is kept and driven.Even if your geographic area and home construction dictates that your home gets a higher-cost premium, Donaldson says there are still things that can be done to mitigate the cost.“Again, you can get a Companion Discount, and there are other things you can do — like having a hail-resistant roof — that will bring down the cost. Setting a higher deductible can lower the rate of your premium, and that’s a key component that members should be aware of.”Coverage and discounts are subject to qualifications and policy terms and may vary by situation.¬© 2015 Texas Farm Bureau Insurance