Why is Car Insurance So Expensive
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The cost of living is going up. It seems that everything has gotten more expensive, and for many people, salaries aren’t going the same way. Car insurance is one of the many costs heading in the wrong direction, and it wasn’t exactly cheap to begin with.So, why is car insurance so expensive, what is driving those high prices, and are insurance companies making a mint, or are their prices justified?
High-Risk vs Low-Risk Age Groups
A 16-year driver in California can expect to pay around $5,000 to $6,000 a year when added to their parent’s policy. The price remains high for 17, 18, and 19-year-olds, but it gets a little cheaper after that. In fact, it gets cheaper for every successive age bracket, only for the price to gradually increase again for drivers over the age of 70.It might seem like a bias against young drivers, and it is, but with reason. Insurance companies set their prices based on anticipated liability, and they use a wealth of statistics to determine those risks.For example, the Insurance Institute for Highway Safety (IIHS) records the following alarming statistics:
- Young drivers are less likely to drive drunk, but more likely to be involved in accidents when they do.
- The rate of night-time crash involvements is 3x higher for male drivers aged 16 to 19 than male drivers aged 30 to 59.
- Fatal passenger vehicle crash involvements are highest for 16-19-year-olds.
- The death rate peaks at 19 for male drivers.
From the insurance company’s perspective, crashes are expensive, and as young drivers are inexperienced and more likely to indulge in reckless activities, they are charged higher premiums.Of course, it doesn’t mean that all drivers in this age group are reckless and irresponsible, but insurers don’t care about the outliers and focus on the bigger picture.Drivers over the age of 70 are also more likely to be involved in accidents, so their car insurance premiums are increased to reflect this risk.
Bad Driving Record
Drivers with violations and at-fault accidents usually pay more for car insurance as there is a higher risk of future accidents and violations. Obviously, it depends on the issue, the severity, and the frequency.Usually, speeding tickets have a minimal effect on car insurance rates if the driver was going just a few miles over the limit. They can have a bigger impact for 20 MPH and more, but even then, they don’t compare to the increases that follow a DUI charge.Driving under the influence of drugs or alcohol is a massive red flag to insurers. It indicates a huge lapse in judgment and suggests that the driver doesn’t respect their responsibilities as much as the insurer would like.Multiple accidents have an even bigger impact.Drivers who have a clean driving record will generally pay a lot less, and those rates should improve the longer that record remains.
Local Accidents and Crime Rates
Car insurance companies base their rates on local statistics. So, in addition to considering the applicant’s driving record and age, they will also look at rates of theft, vandalism, and car accidents.You might have the same record and the same vehicle as a friend in another town, but if your town has much higher rates of vandalism and theft, you will pay more. As far as the insurance company is concerned, your vehicle is more likely to be stolen or vandalized, which means you’re more likely to claim, thus leaving them out of pocket.In such cases, you may be able to reduce car insurance rates by installing anti-theft devices and parking your vehicle somewhere safe.
Car Types and Driving Frequency
How often you drive can influence car insurance costs, as drivers who spend longer on the road are more likely to make claims. The car that you drive will also factor into the equation, with the insurance company considering how much it will cost to replace or repair, as well as how much of a target it is for thieves and criminals.The size, speed, and power of the car play a role as well. Car insurance companies consider how much damage the vehicle can do to a person or property in an accident. A little car that can’t reach very high speeds isn’t going to do as much damage as a muscle car that can tear up the asphalt, for instance, and as liability coverage is required in most states, the potential for damage/harm is key.
Insurance Coverage
Coverage options have one of the biggest effects on insurance costs, as the insurer uses them to determine risk and exposure.If you want complete coverage with a minimal deductible, it means the insurer will be more exposed. In the event of an accident, you will almost certainly make a claim and could put them in the red. The premiums will be set much higher to account for this risk.
The Insurance Company
Insurance companies rely on similar data, but they have their own ways of processing it and underwriting policies. They also have their own profits, loss, and exposures to think about, so auto insurance rates can differ considerably from one insurer to the next.It is why you should never take the first offer that you receive, and why you shouldn’t let your policy auto-renew. Always shop around and see what’s available, as the difference can be significant.
What About Gender and Credit History?
You can pay more for car insurance based on your credit score and gender, but not in California. Insurers are not allowed to take this into consideration. The same is true for a few other states, but most car insurance companies in the US can consider these variables.We mentioned that teenagers are some of the highest-risk drivers in the country. What we didn’t say is that those stats only really apply to males.For example, the aforementioned IIHS statistics note that there were 3,058 vehicle crash deaths involving teenage drivers in 2021. Of these, only 33% were female. The gap has actually closed over the years, going from a 25/75 split in 1975 to 30/70 in 1985 and hovering between 32/68 and 37/63 in the last 5 years, but it’s still a big difference.It’s a similar story with credit scores, with multiple studies showing that there is a strong correlation between credit scores and insurance claims. For whatever reason, if you have a bad credit score then you are more than likely to make a claim on both your home insurance and auto insurance.It goes to show you that there are many variables at play here and many things that can seemingly influence an individual’s chances of claiming. But of course, these two particular variables don’t come into play for drivers in California.
FAQs
Is car insurance required?
Most states require some form of insurance coverage. However, it has been estimated that there are around 28 million uninsured drivers in the US, so many don’t take those rules seriously.
Can my race or religion alter my car insurance rate?
No, car insurance companies are not allowed to take either of these into consideration when determining your rates. Unlike the gender/credit score variables mentioned above, this rule applies across the country and not to a handful of states.
How come my car insurance is so expensive?
Are you a young or inexperienced driver? Are you over the age of 70? Do you have any accidents or tickets on your record? If so, you could be looking at some hefty premiums. If not, it may be down to your location or the car that you drive, as well as general price increases.In any case, make sure you compare rates from multiple insurers to get the best price.
Why did my car insurance go up in 2023?
There are several reasons why your premiums may have increased this year. Assuming you weren’t ticketed, involved in an accident, changed your car, or moved house, it’s likely the result of inflation and rising repair costs. Parts and labor are both more expensive than they were a year ago, and as insurers are the ones paying the bills, they need to account for the higher costs.
Summary: Why is Car Insurance Expensive?
Insurance companies are for-profit businesses that always have their bottom line in mind. However, insurance is a highly competitive industry and they know that customers have plenty of other options. So, while it may seem like they are charging too much and taking their customers for a ride, it’s more of a reflection of the current nature of your personal risk factors, as well as the rising costs of repairs.After all, it’s all about balancing risk and costs. If the risk is higher and the potential costs are greater, the premiums will be raised to reflect this.
