Well, it is all based on statics.
Trust me, you want it that way.
For those of you who took some kind of finance class in high school or college- this may be a review, but many people haven’t or who need a review, here is how insurance works in a nutshell.
When you pay your insurance bill you are essentially pooling your money together with everyone else who has an auto insurance policy with your company.
That money goes in a bank account or I will reference that as a giant “bucket of money”.
When a person has an accident or claim- the money comes out of this bucket.
Now sure, the insurance company invests some the money because they want to make the amount of money in the “bucket” to grow so that there is as much money as possible! Besides claims, they also need to pay things like salaries, advertising, and overhead out of that revenue.
But that pot of money is important and as someone who is putting your money into it and wants to make sure that there is money to pay out if you need it- you have a vested interest in making sure that there is always enough there. You want to make sure that there is always more money going in that what is going out. It is simple math.
In other words, you don’t want people filing claims for stupid reasons. If every single person purchased a $500 every 6 month policy and then got into an accident that paid out $20,000 but then left after a year because they were frustrated that their rate went up $50- the pot of money would drain out really fast. Putting $1,000 into the bucket but taking out $20,000 hardly seems fair.
But people b1#ch and moan about it all the time.
How should prices be calculated then?
There are a bunch of insurance (affectionately) “nerds” behind the scenes who crunch numbers and enter algorithms into computers, and they submit “rates” to the state to approve.
Yes! Rates are all approved by the state’s insurance commissioner. They cannot be negotiated. Insurance sales is not like going to a car sales lot. If you call your insurance sales person and they magically lower your rate, they are either lowering a coverage or they found a discount that you qualified for.
When the insurance “Gods” set those prices- they are going to apply higher rates to drivers who are going to be at a higher risk to file a claim. The goal is that if you are more likely to file a claim, then you are going to have to put more money into the pot so that if you do file a claim, there won’t be quite as high of a difference between what you have paid in and what the company has paid out.
Those extra rate tiers are all based on statistics that can be proven to the state insurance commissioner. They don’t just discriminate willy-nilly! These actuaries are constantly adjusting rates to make sure that the statistics they are using are correct and that the “bucket” of money is on track. Think of it like how mortgage rates are adjusted.
If all of a sudden your zip code is having a ton of cars stolen- you could expect a rate increase if you have comprehensive coverage on your policy. If the cost of car parts goes up due to inflation there is going to be an increase because whether you hit someone or you have coverage on your own car- you need to have coverage for fixing cars and it is going to cost more.
Everything relates back to real data.
And that, my folks, is how insurance prices work.
NOTE: Wisconsin is the 7th least expensive state in the United States for insurance pricing!