Why do good drivers get cheap car insurance rates?
If you are a good driver, you will get better car insurance rates than someone who has an accident or speeding violation. The reasons for this have to do with the risk an insurance company takes when it insures any individual against loss or claims from an automobile accident.
Almost every time an insurance company has to pay a claim, it must spend far more than the face amount of the claim itself.
First, the company must pay an adjustor to go to the site of the accident or the insured’s home and inspect the car for damage. The adjustor may also have to go to the victim’s home and talk to him or her as well as inspect the car that the victim was driving. Finally, the adjustor must make a report to the company verifying that there was no fraud involved in the accident and that the damages are as serious as reported. It is estimated that one in four insurance claims are fraudulent in some way, so insurance companies do not have a choice when it comes to inspecting each and every claim that is filed.
Another expense that insurance companies incur when someone files a claim is processing and handling. Employees must be paid to handle the great amounts of paperwork generated by a claim and to issue checks to victims and the insured party. Finally, someone must be paid to follow up on the claim and ensure that all is handled and the case closed, and someone is paid to do the accounting and other jobs necessary to process the claim from start to finish. In all, many people are involved in processing a claim, and all of these people must be paid in addition to the payout for the claim itself. A “simple” car accident can cost thousands of dollars by the time all is added up.
Because claims are so expensive, it is very important that insurance companies calculate the amount to charge for premiums correctly
The correct amount is one that pays all the expenses associated with claims but still leaves money for the insurance company to make a profit. If claims numbers are low, the amount needed to do this is also low; however, as claims rise, the insurance company must take in more in premiums than it pays out in order to stay in business.
Of course, premiums are not the only source of income an insurance company has
Insurance companies also make money by investing their capital in stocks, bonds, and other forms of investment. If the company is a mutual company, this profit comes back to the policyholders in the form of dividends. If the company is a corporation, the shareholders are paid for their share of the company’s profit.
In order to keep making money, it is very important that the company correctly identify those groups at high risk of costing the company money, and in turn charge appropriate premiums to cover the risk associated with these groups. This is why young people’s insurance premiums are often much higher than those of people a few years older. It is statistically much more likely that a young man of 18 will be involved in an accident than a woman of 45, so these two groups of people are not charged the same amount for insurance premiums.
Good drivers are one group that enjoys low premiums no matter what their ages
This is because for every year that a person does not have an accident, that individual has contributed to the process of saving the company money. Every year that the individual remains accident free is another year the company has avoided those tremendous costs associated with claims, so it is likely the company will reward this customer with lower premiums. Further, insurance companies want to keep these types of customers happy so that they stay with their current insurance provider, just as any company wants to keep its best customers. Your driving record determines, in large part, exactly how valuable you are to your insurance company.
Speeding tickets can also cause rate increases and are considered a “black mark” on your driving record even though these violations do not cost your insurance company money. However, insurance companies know that those who get moving violations (especially tickets for very excessive amounts of speed) are far more likely to have at-fault accidents, and those accidents are likely to be more severe than those people who obey traffic laws and keep their speed under the limit.