Personal Finance Tips

Whenever you ask a talking head paid by the insurance industry, “How do you calculate the premium rate?” the answer is always the same. There’s a big smile of sincerity and that reassuring voice says, “We look at the driver. It’s all about who you are and what you drive.” And that, of course, is how it should be. Actuaries are paid to estimate the risk of accidents and, as they keep telling us, the statistics never lie. These actuaries are like pack rats. They collect every last detail of every accident that gets reported. It doesn’t matter whether it’s a police report, a claim to the insurers from a hospital for treating accident victims, or reports in local newspapers. They have information about accidents going back to the time we were switching over from real horses to horse-powered engines. So ask how many men aged 33 have had an accident at 2 a.m. while driving a red Ford Contour in the rain with a new moon and, with the click of a mouse, you will have the answer by return. It’s the detail that’s so impressive. More importantly it shows exactly how many claims are made by male as opposed to female drivers, and what the average value of the claims is.

All around the world, the statistical evidence shows women making fewer claims and, when they are involved in accidents, the amount claimed tends to be lower.

The reason for this is that, in general, women drive within the law. They do not try to beat the lights or drive too fast on city streets so, if there is an accident, they are traveling more slowly and the impact is less damaging both to the vehicles and the people inside. Not surprisingly, this excellent safety record has been rewarded by lower premiums. Where the risk is lower, drivers pay less. Except, in Europe, this will change next year.

The European Court for Human Rights has just ruled that men and women must pay the same premiums. At the end of 2012, there must be a new system in place to calculate premiums without relying on gender as a key factor. So what’s going on? Well, ask yourself, is it fair to charge someone more to insure their vehicle just because they are male. No one asks to be born male or female so why penalize all those who have the bad luck to be born male? Keeping this real, men don’t crash because their sexual apparatus gets caught in the steering wheel. People get into accidents because they drive badly. There’s no point in forcing people to pay more because of something they are powerless to control. There’s every reason to base auto insurance quotes on actual driving records because, if the record is bad and the premium rate is high, it gives those drivers an incentive to improve their driving. Calculating premiums should be very personal, looking at how well each individual drives. Grouping everyone together on the basis of their gender for issuing auto insurance quotes is arbitrary and unfair (at least, in Europe).

There have been hundreds of front page headlines over the apparent failure of Toyota to deal with what is called sudden acceleration syndrome. This is where you are just sitting in your vehicle with the engine running or driving it on the road and, without warning, it suddenly accelerates. If you believe the stories, we have had people unable to stop on the highways even with helpful emergency services telling the drivers to switch off the engine. It seems some drivers are really determined to experience uncontrolled acceleration, and their experiences may make it more likely driver error is one of the main causes of the syndrome. Indeed, if you listen to the manufacturers, they all sing the same tune. With the accelerator and brake being next to each other, it’s easy for the driver to make a mistake and press the wrong pedal. In reality, the syndrome has affected almost every make of vehicle on the road over the last ten years. It was because of the scale of the problem that manufacturers introduced the shift interlock system which makes it impossible to engage drive unless you have your foot on the brake.

Let’s put Toyota’s problems in context. Every major manufacturer has had recalls with problems affecting driver and passenger safety. The air bags in the Acura MDX were defective, and a plague of electrical problems affected the headlights in the Ford Focus. One of the reasons why Toyota has attracted more attention than the others this year is a type of protectionism. You attack the safety record of foreign importers to boost the sales of locally produced vehicles. Taking the statistics overall, Toyota actually has a better safety record than most other manufacturers, i.e. fewer people are injured per mile driven. With virtually every make and model recalled, the manufacturers show they are paying attention. Your safety is important to them. But what happens to your insurance premium if your vehicle is recalled?

Insurance companies find any excuse to raise their premiums but it’s very unusual for rates to rise following a recall. That would be penalizing you for the manufacturer’s design defects, and most states have regulations in place to prevent increases solely based on a recall. If you think you have been victimized in this way, report the facts to your local Department of Insurance. Should you prefer to change insurers, make sure you follow the terms and conditions for cancelling the policy. Many insurers impose penalties for early cancellation.

One word of warning – do not ignore a recall notice. Auto insurance companies like to find reasons to avoid paying out on claims. If you do not have your vehicle repaired and the defect causes an accident, that will be your fault and your claim will be reduced or refused. Even if there is no accident, the insurer can impose a surcharge or refuse to renew the insurance. It would be good if auto insurance companies always showed themselves in the best possible light. Unfortunately, the drive to make the maximum profit often makes them seem vicious and cold-hearted. There is no compassion in business. So always approach insurance like every other service. Shop around to find the best make and model of vehicle – one that does well in crash tests and is not popular with thieves. Then get auto insurance quotes from as many companies as possible and find the best deal. Rest assured. Recalls are the least of your problems and do not affect the premium rate over the short term.

The business of insurance is called underwriting. The company enters into a contract (called a policy) and agrees to indemnify a group of people like you against defined losses. So it uses some heavy duty math to work out the probability of the losses being incurred. It’s called risk assessment and relies on a complicated use of statistics. For vehicle insurance, the companies collect the details from every reported traffic accident in the US looking at the age, sex and occupation of the driver, the make and model being driven, the time of day, the road conditions, and the extent of the damage. The insurers share the information on the current costs of replacement parts and the labor to fit them.

They also manage to talk the health insurance companies into sharing their current costs on medical treatment for those injured in traffic accidents. With all this information, they can make good estimates of the cost of loss, i.e. the total amount they may have to pay out if they insure, say, 100,000 drivers. They take this estimate, add the cost of running the insurance company and a profit margin. This total is then divided between all the 100,000 as their premiums. Some companies divide the total equally so the good drivers subsidize the bad. But the majority adjusts the individual amounts based on the driver’s safety record. That way, each policy holder pays more or less depending on how well he or she drives. This is more fair.

But, to cut costs, some insurance companies make more general assumptions about the likelihood of losses. Instead of personalising the risk assessment, they focus the assessment on generalities. The most common is the use of the zip code. In some areas of a town or city, there are higher levels of vehicle theft and vandalism. Some areas have more people driving while intoxicated or impaired through drugs. Because of the design of the local road system, there may also be a higher number of accidents. The insurers therefore charge everyone living in those areas a higher premium. Apart from the unfairness at an individual level, some lawyers believe it is active discrimination because many of the zip code areas loaded with higher premiums have higher concentrations of particular racial or ethnic groups. California has formally prohibited insurance companies from using zip codes, credit scores and other factors not directly relevant to the assessment of driver safety. In those states, insurers continue to trade and make a profit. It has not been the end of the world they predicted.

So, depending on the US state in which you live, your premium may either be calculated based on your personal driving record, or it may be based on your zip code and credit score. Either way, the task of finding the cheapest car insurance remains the same. You have to shop around the companies licensed to sell policies in your state and find the best deal. If there is active competition between the insurers, the premiums will be lower and you will find cheap car insurance without too much difficulty. But if the state is unregulated and insurers do not compete, it will be more difficult to find a cheap policy.