Auto Insurance Risk Selection
Auto Insurance Risk Selection

Table of Contents

Auto Insurance Risk Selection

Auto insurance risk selection is the process through which vehicle insurers assess whether to provide coverage to an individual and determine the corresponding insurance premium. This process can be influenced by government mandates or insurance company regulations, depending on the jurisdiction. In many cases, insurers have more flexibility in setting prices for physical damage coverages than for mandatory liability coverages.

When government mandates don’t dictate the premium, insurers typically rely on actuarial calculations based on statistical data to determine the appropriate rate. Several factors come into play when assessing premiums, including vehicle characteristics, chosen coverage (such as deductible and limit), driver profile (including age, gender, and driving history), and vehicle usage (like commuting habits and predicted annual mileage). These factors collectively influence the insurer’s estimation of the expected cost of future claims, thus shaping the premium amount.


Conventional methods for determining motor vehicle insurance costs involve collecting pertinent historical data through a personal interview or a written application completed by the insurance applicant. This data is cross-referenced with the applicant’s public motor vehicle driving record, typically maintained by a government agency like the Bureau of Motor Vehicles. This process leads to the classification of the applicant into a broad actuarial class, which informs the assignment of insurance rates based on the insurer’s empirical experience. Numerous factors are considered in this classification process, such as age, gender, marital status, residential location, and driving history.

The current insurance system groups vehicles and drivers into actuarial classes, which are based on various classifications, including:

Vehicle: Age, manufacturer, model, and value.
Driver: Age, gender, marital status, driving record (using government reports), violations (citations), at-fault accidents, and place of residence.
Coverage: Types of losses covered (e.g., liability, uninsured or underinsured motorist, comprehensive, and collision), liability limits, and deductibles.

These classifications, like age, are further subdivided into actuarial classes, such as 21- to 24-year-olds, to determine specific vehicle insurance costs based on the unique combination of attributes for a particular risk. For instance, the following information could lead to a unique vehicle insurance cost:

– Vehicle: Age – 7 years old; manufacturer, model – Ford, Explorer XLT; value $18,000
– Driver: Age – 38 years old; gender – male; marital status – single; driving record (based on government reports) violations – 1 point (speeding); at-fault accidents – 3 points (one at-fault accident); place of residence 33619 (zip code)
– Coverage: Types of losses covered; liability – yes; uninsured or underinsured – no; comprehensive – yes; collision – yes; liability limits – $100,000/$300,000/$50,000; deductibles – $500/$500.

Any change to this information may result in a different premium if it leads to a different actuarial class or risk level. For instance, changing the driver’s age from 38 to 39 might not alter the actuarial class, as both age groups may belong to the same class. However, a change from age 38 to 45 may impact the premium due to differences in associated risk between those age ranges, leading to a change in actuarial class or assigned risk level.

Current insurance rating systems also offer discounts and surcharges based on various factors, including vehicle use, equipment on the vehicle, and driver type. Common surcharges and discounts encompass:

Surcharges: Business use
Discounts: Safety equipment on the vehicle (e.g., airbags and antilock brakes), theft control devices (passive systems like “The Club” and alarm systems), and driver attributes (e.g., good student and safe driver with no accidents), as well as group discounts for senior drivers and fleet drivers.


The location of the vehicle owner can impact insurance premiums, with areas characterized by high crime rates typically resulting in higher insurance costs.


Insurance companies often charge higher premiums for policies on vehicles whose primary driver is male, particularly younger males, as they are statistically more likely to engage in aggressive driving behaviors. However, this gender-based discrimination may be discontinued as the driver reaches a certain age.

On March 1, 2011, the European Court of Justice ruled that insurance companies using gender as a factor in calculating insurance premiums were in violation of EU equality laws. The Court found that these practices discriminated against men. Nevertheless, in some regions like the UK, insurers have continued to indirectly use gender as a factor by considering the profession of the insured. Professions typically associated with men are deemed riskier, even if they were not prior to the Court’s ruling, while the opposite is true for professions predominantly held by women. Consequently, the ruling has resulted in lower premiums for men but higher premiums for women, leading to an equalization effect that has also been observed in other types of individual insurance, such as life insurance.


Teenage drivers with no prior driving history are typically subject to higher car insurance premiums. However, young drivers often have the opportunity to lower their premiums through various means, such as enrolling in recognized driver training courses like the Pass Plus program in the UK. In the United States, many insurers provide discounts to students with good academic records and offer resident-student discounts to those living away from home. Generally, insurance premiums tend to decrease when a driver reaches the age of 25. Some insurance companies even offer standalone car insurance policies designed specifically for teenagers at reduced rates. These policies often come with restrictions on teenage driving, such as prohibitions on nighttime driving or giving rides to other teenagers, which help mitigate the insurer’s risk.

On the other hand, senior drivers, typically aged 65 and older, are often eligible for retirement discounts due to their lower average mileage. However, insurance rates may increase for senior drivers beyond the age of 65, as they are associated with a higher risk profile. This increased risk is attributed to factors such as slower reflexes, longer reaction times, and a higher susceptibility to injury among older drivers.

U.S. Driving History

In the majority of U.S. states, moving violations, which encompass actions like running red lights and speeding, result in the accumulation of points on a driver’s record. As more points accumulate, it signifies a greater likelihood of future violations, prompting insurance companies to periodically review drivers’ records and potentially raise their premiums as a result. These rating practices, such as imposing penalties for a poor driving history, are not mandated by law. Many insurers permit one moving violation every three to five years before considering premium increases. Crashes have a similar impact on insurance premiums. The severity of the crash and the number of points assigned can lead to rate hikes of up to twenty to thirty percent. It is essential for drivers to disclose any motoring convictions to insurers, as insurers assess risk based on prior driving experiences.

Marital Status

Statistics indicate that married drivers are involved in fewer accidents than the rest of the population. Therefore, policyholders who are married typically receive lower premiums compared to single individuals.


The occupation of the driver can be considered when determining insurance premiums. Some professions may be seen as having a higher likelihood of resulting in damages, especially if they require frequent travel, the transportation of valuable equipment or inventory, or if they are predominantly associated with either women or men.

Vehicle Classification

Two of the primary factors that play a significant role in determining the underwriting risk for motor vehicles are their performance capabilities and retail costs. Many mainstream auto insurance providers have specific underwriting guidelines that apply to vehicles either designed for higher speeds and performance or those that exceed a certain retail value threshold. Luxury vehicles, commonly associated with higher retail prices, often result in more expensive physical damage insurance premiums because replacing them can be costly. High-performance vehicles tend to have higher premiums due to the increased potential for risky driving behavior.

Motorcycle insurance, on the other hand, may come with lower property-damage premiums since the risk of damaging other vehicles is typically lower. However, it often carries higher liability or personal-injury premiums because motorcycle riders face different physical risks while on the road. Risk assessment for automobiles also considers statistical analyses of reported thefts, accidents, and mechanical malfunctions for each year, make, and model of vehicle.


Certain car insurance plans do not take into account the frequency of a car’s usage. However, some insurance providers offer discounts for low-mileage drivers. Another approach to differentiation involves considering the distance traveled on a regular basis between a person’s home and their typical daily destinations.

Appropriate distance estimation

Another crucial element in calculating car insurance premiums is the annual mileage driven by the vehicle and its purpose. Commuting to work daily within a set distance, particularly in urban areas with well-known traffic routes, poses different risks compared to the usage of a vehicle by a retiree who no longer works. Traditionally, this information was solely provided by the insured individual, but some insurance companies now gather regular odometer readings to verify the risk.

Odometer-based systems

Cents Per Mile Now (1986) advocates introduced classified odometer-mile rates, a form of usage-based insurance. Once the company’s risk factors have been applied, and the customer has accepted the per-mile rate offered, customers purchase prepaid miles of insurance coverage as needed, similar to purchasing gallons of gasoline (litres of petrol). Insurance coverage automatically terminates when the odometer limit (recorded on the car’s insurance ID card) is reached, unless additional mileage is purchased. Customers monitor their miles using their vehicle’s odometer to determine when to buy more coverage. The company does not bill the customer retroactively, and the customer is not required to estimate a “future annual mileage” figure to obtain a discount from the company. During a traffic stop, an officer can easily verify the current insurance status by comparing the figure on the insurance card with the odometer reading.

Critics point out the possibility of fraud through odometer tampering. While newer electronic odometers are challenging to manipulate, they can still be defeated by disconnecting and reconnecting the odometer wires later. However, as noted on the Cents Per Mile Now website:

In practice, resetting odometers requires specialized equipment and expertise, making insurance fraud a risky and uneconomical endeavor. For instance, to fraudulently obtain 20,000 miles of continuous coverage while only paying for the 2,000 miles shown on the odometer in the 35,000 to 37,000 range, the resetting would have to be performed at least nine times to stay within the narrow 2,000-mile coverage range. Furthermore, legal penalties strongly discourage insurance fraud through odometer tampering. Odometers have long served as a measuring device for factors such as resale value, rental and leasing charges, warranty limits, mechanical breakdown insurance, and cents-per-mile tax deductions or reimbursements for business or government travel. Odometer tampering, if detected during claim processing, nullifies the insurance coverage and is subject to significant fines and potential jail time, as governed by both state and federal laws.

Under the cents-per-mile system, rewards for driving less are automatically provided without the need for administratively cumbersome and costly GPS technology. Uniform per-mile exposure measurement finally establishes the foundation for statistically valid rate classifications. Insurer premium income naturally adjusts to changes in driving activity, mitigating the need for insurer rate hikes when reduced driving activity lowers costs but not premiums, as is often the case today.

GPS-based system

In 1998, Progressive Insurance initiated a pilot program in Texas, offering drivers a discount for installing a GPS-based device that monitored their driving behavior and transmitted the data via cellular phone to the company. However, this program was discontinued in 2000. In the subsequent years, many insurance policies, including those from Progressive, have been tested and successfully introduced globally under the umbrella of Telematic Insurance. These ‘telematic’ policies typically rely on black-box insurance technology, which originally evolved from stolen vehicle and fleet tracking but is now employed for insurance purposes. Since 2010, GPS-based and Telematic Insurance systems have gained wider acceptance in the auto insurance market, no longer limited to specialized auto-fleet markets or high-value vehicles (with a focus on stolen vehicle recovery). Contemporary GPS-based systems are marketed as ‘PAYD’ (Pay As You Drive) insurance policies, ‘PHYD’ (Pay How You Drive) policies, or, since 2012, Smartphone auto insurance policies that utilize smartphones as GPS sensors. For an in-depth examination of smartphones as measurement probes for insurance telematics, please refer to the detailed survey provided in [source].

OBDII-based system

The Progressive Corporation introduced Snapshot, a program designed to determine a personalized insurance rate by monitoring how, how much, and when a car is driven. Snapshot is presently accessible in 46 states, as well as the District of Columbia. Due to the regulation of insurance at the state level, Snapshot is not currently offered in Alaska, California, Hawaii, and North Carolina. The driving data is collected through an on-board telematic device, which connects to a car’s OnBoard Diagnostic (OBD-II) port (all gasoline-powered vehicles in the USA manufactured after 1996 are equipped with an OBD-II port) and transmits information about speed, time of day, and the number of miles the car is driven. Vehicles that are driven less frequently, in less risky manners, and during less risky times of the day are eligible for significant discounts. Progressive holds patents for its methods and systems for implementing usage-based insurance and has licensed these techniques and systems to other companies.

Metromile also employs an OBDII-based system for its mileage-based insurance. They offer genuine pay-per-mile insurance, which does not consider driving behavior or style. Instead, users pay a base rate in addition to a fixed rate per mile. The OBD-II device records mileage and subsequently sends this data to servers. This type of insurance is designed to be cost-effective for drivers who don’t accumulate many miles on their vehicles. Currently, Metromile exclusively provides personal car insurance policies and is accessible in California, Oregon, Washington, and Illinois.

Credit Ratings

Insurance providers have begun incorporating the credit ratings of their policyholders into their risk assessment processes. Policyholders with favorable credit scores are offered reduced insurance premiums, as there is an assumption that they exhibit greater financial stability, responsibility, and possess the financial resources to effectively maintain their vehicles. Conversely, individuals with lower credit scores may experience an increase in premiums or even the cancellation of their insurance policies. Surprisingly, research has indicated that responsible drivers with imperfect credit histories may face higher premiums compared to less responsible drivers with favorable credit records.

Behavior - Based Insurance

The application of non-intrusive load monitoring as a means to identify drunk driving and other risky behaviors has been suggested. Currently, there is a US patent application that integrates this technology with a usage-based insurance product to establish a novel form of behavior-based auto insurance. This patent application is open for public commentary through the peer-to-patent system. This approach, known as Behavior-based Safety, places emphasis on monitoring and assessing driving behavior. Behavior-focused insurance schemes, particularly those centered around driving, are commonly referred to as Telematics or, in some instances, Telematics2.0. Some of these monitoring systems concentrate on behavioral analysis, such as evaluating the smoothness of driving.

Usage-Based Insurance

Traditional rating systems primarily rely on historical loss data and the past driving records of individuals with similar characteristics. However, more recently, electronic systems have emerged that directly monitor and communicate an individual driver’s actual driving performance to the insurance company. This monitoring enables the insurance company to assign the driver to a risk class based on their observed driving behavior. As a result, an individual’s risk classification can fluctuate from month to month depending on their driving habits.

For instance, a driver who covers long distances at high speeds in one month might be categorized as high risk during that period and face a higher premium. Conversely, the same driver who drives short distances at lower speeds in the following month could be placed in a lower risk class, resulting in a reduced premium.

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