Auto insurance algorithms

Purchasing auto insurance on your vehicle is the law across the United States and many other countries. The amount an individual pays is based on many factors, some of which the average consumer would not even imagine would be included in setting a rate. Rates vary widely among drivers and even among insurance companies for the same types of drivers. This is because the factors insurance companies emphasize vary among the companies.

Insurance companies employ actuaries to determine the risk levels for different factors and the costs associated with those risks. Actuaries have to collect a great deal of data and analyze them to make them useful in the computer algorithms that are used to calculate rates. Much of the data they collect fluctuate, so there is ongoing data collection and analysis.

Auto Insurance Factors

The table below lists a number of the factors that are considered by insurance companies in determining the cost of insurance for an individual driver.

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The Heavy Weights

Two of the most influential factors on insurance rates are driving record and the type of vehicle. Driving record should be an obvious factor: Those who get speeding tickets and have had accidents pose a risk for additional driving problems. The type of vehicle has a variety of factors that influence the cost of insuring that vehicle, including the cost of parts, the difficulty to make repairs, safety features and records and the likelihood of it being stolen. For example, Honda Accords and Honda Civics are two of the most-stolen cars, so owners of these types of cars will pay higher rates than similar drivers with other types of cars.

Grouping

Insurance companies use data that is compiled over several years on the factors listed above to predict the statistical frequency with which people in particular groups (those with the same characteristics) file claims. They also determine the average amount of money paid on the claims to people in the groups.

Direct Effects

All of the factors listed above influence rates as determined by the insurance companies and are largely out of the consumer’s control. There are three other factors that are under the control of the consumer: types of coverage, levels of coverage and deductibles. As with the other factors, the insurance company puts a price tag on these three factors. Consumers can make choices about these factors and see how their choices influence the premiums they will pay.

While some types of coverage are mandatory (e.g., personal injury protection), others are optional, depending on the state in which the car is registered. Some of the optional (though almost always selected) coverages are uninsured motorist, comprehensive and collision coverage. Other optional coverages (which are low-cost items) are emergency road service and rental reimbursement.

Consumers can choose the level of coverage (the maximum amount the insurance company will pay out on a claim) for some of these coverages. In general, the higher the level of coverage (say $250,000 instead of $100,000) and the lower the deductible ($250 instead of $1,000), the higher the rate. This is because the insurance company could end up paying out more money (up to $250,000) and the consumer is not willing to pay much ($250) to cover the cost of a claim.

Shop Around

While auto insurance is required by law, consumers should also have peace of mind knowing that if they are in an accident, they will not be severely hurt financially. Consumers, however, should shop around for insurance because, as stated at the beginning of this article, rates for the same groups of people vary among companies. Different companies also offer discounts for different things, such as the number of insured cars or drivers with that company. As statistical analysis and rate changes occur constantly, it is a good idea to review your insurance coverage every year or two and check with a few insurance companies to possibly get insurance at a lower rate.

To learn more about the statistical analysis that is considered when determining auto insurance rates, you may want to consider pursuing a degree in data science or analysis.