Why Does Car Insurance Vary So Much?

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Before we can explore why the prices of car insurance vary so much, it’s important to understand how insurance rates are determined.

At a high level, insurance prices are calculated by professionals called Actuaries. The primary goal of an actuary is to use statistics to predict expected claims and losses by the insurance company. These expected claims then determine the rate aka “price of your insurance”  

To be more specific, the more likely a certain group of people are to file a claim, the more expensive their auto insurance rate. This likelihood is based on other people, in similar groups, in similar areas filing claims and incurring payouts from the auto insurance company. 

These groupings can include:

  • Your geographic area
  • The vehicle you drive
  • Your age, gender, or marital status
  • Your history with accidents, tickets, or claims

Why do car insurance rates vary by state?

cars drive while it's sunset

Rates can vary widely by state for several factors.

As we established above, the expected payouts or losses from car insurance companies will affect the rate. States vary in many ways from each other and these can lead to higher or lower losses which then in turn cause rates to be higher or lower respectively. 

Some factors that can impact auto insurance rates, and ultimately your total car insurance premiums, are:

1. Regulations and Specialty Coverages

Every state has different “minimum coverages” which can cause wide fluctuations in prices from state to state. For instance, in the state of Florida, the minimum coverage is $10,000 of Property Damage Liability and $10,000 of “no-fault” aka Personal Injury protection.

This coverage in essence pays for damage to the other person’s car and provides $10,000 for your own injuries, regardless of who is at fault.

Another no-fault state is Michigan, which provides $100,000 of Personal Injury Protection and largely contributes to why they have the highest rates in the country. 

In contrast, Georgia’s minimum limits are $25,000/$50,000/$10,000 for Liability. This means that if you cause an accident, you have $25,000 per person up to $50,000 per accident to pay for the other person’s injuries and $25,000 to pay for the damage to their car.

These coverages pay out at different frequencies and therefore can affect rates. 

2. Population and Claim Frequency

The more claims in a given state, the higher the prices are going to be.

Insurance companies often aim to keep their “loss ratio” below 65%. This means that for every dollar they take in from premiums, they pay out 65% or less for claims. The other 35% is used for operational expenses like staffing, claims workers, marketing, and more. 

The higher the population, the more cars there will be on the road. The more cars there are on the road, the more likely an accident and a claim will occur. The more likely a claim occurs, the more money is paid out and therefore the higher the rates. 

3. Crime and Fraud Rates

You’re starting to get the picture, right?

The more car insurance companies have to pay for claims, the higher the premiums/prices will be for customers. 

In states where there are large amounts of crime or fraudulent claims, rates will naturally be higher.

For crime, a recent example can be seen with Kias and Hyundais. Following a TikTok challenge video that went viral, many people realized that Kias and Hyundais were vulnerable to theft. In large cities, thefts of these vehicles skyrocketed causing some car insurance companies to implement higher rates for these vehicles, or drop them altogether. 

When it comes to fraud, there have always been schemes for people to get insurance payouts that weren’t wholly truthful. When fraudulent claims occur, most of the money is spent on attorneys and legal fees to fight these claims. Attorneys and legal fees are not cheap, and therefore contribute to the overall rates!

4. Natural Disasters

If your state is prone to hurricanes, tornados, flooding, or other natural disasters, it’s likely that you will see rate increases following a major event.

When natural disasters cause damage, insurance companies incur what is called “catastrophic loss.” This means that they’ve incurred losses for thousands of people all at once, causing strain on the reserves of the insurance company. Because they have to pay out so much, the insurance companies have to raise auto insurance rates.

This is because their Reinsurance (aka insurance for insurance companies) goes up, therefore they need to raise their own rates to remain solvent and in business. Every insurance company is required to have reinsurance.

Why Do Car Insurance Premiums Vary by Company for the Same Coverage? 

Car insurance premiums vary because each insurer is looking for a different customer profile.

Some companies look for people who are young or new drivers, while other companies look for senior citizens. Each company chooses a niche and prices its insurance products accordingly.

If all the insurance companies went after the best drivers with the lowest likelihood of claims, many people would be left uninsured. 

How Do Age and Gender Affect Car Insurance Rates?

Gender, contrary to popular belief, has a minimal impact on car insurance rates. While it is true that men sometimes pay more than women, price differences are often negligible. 

Where the price varies significantly is based on age. There are two age brackets that tend to pay more than others. The first is young drivers, aka drivers under the age of 25 years old. When drivers are between the ages of 15 and 25, they’re going to pay the highest rates of insurance.

This is partly due to the high chance of accidents and claims by young drivers, but also because many companies factor in the number of years someone has been licensed. If someone has only been licensed for 1 year, they’re going to pay significantly more than someone who has been licensed for five years. 

The other age bracket is senior citizens over the age of 75. While many senior citizens believe that they should be paying less because they have more experience, the insurance companies often charge them more because they file more claims. Specifically, it is statistically proven that after age 75, the likelihood of drivers getting into a small accident or “fender bender” goes up dramatically. These claims are often in parking lots, but the damage can be in the thousands to repair. 

How does the type of vehicle affect car insurance rates?

The main myth we hear regarding insurance on vehicles is that “the faster the vehicle, the more expensive the insurance.” That is not true, at least not entirely. 

The main factor for your vehicle’s rating is based on how many similar vehicles that are of the same make/model and in the same year range were in accidents and incurred claims. Some vehicles, like the Kias and Hyundais we mentioned above, have higher rates because they’re more easily stolen than other vehicles. Teslas have high car insurance premium rates because they’re extremely expensive to repair when in an accident. We’ve also seen in many markets Volkswagen Jetta’s being very expensive, likely due to their popularity with young drivers.

In contrast, Porsches are some of the cheapest cars to insure. Why? 

Well because they’re often not driven daily. Because they’re only driven occasionally, they’re much less likely to be in an accident. Even though they’re expensive to fix, the low frequency of claims on Porsches keeps them relatively cheap to insure. If I’m an insurance company, I’m trying to get as many of these “low accident” vehicles as possible!

Andrew Filar

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