Auto insurance explained, Q&A welcome

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The purpose of this thread is to explain auto insurance and answer any questions. This won't be nearly as controversial as some of the other threads. There are a bunch of other people in insurance as well so their experience will be appreciated.

I used to be a claim adjustor for a major auto insurance carrier. Now I do legal work for some of the largest insurance portfolio in the world.


Insurance is not complicated but not simple either: Insurance - Wikipedia, the free encyclopedia


Generally, there are several key factors associated with property and casualty insurance:

1. You have something worth $x.
2. There is a y% that something will happen, where 0<y<100.
3. You pay an insurance carrier a premium $z.
4. When the bad thing happens, the insurance carrier will pay you enough to bring your property back to $x.

It's simple, but if you're missing any of these elements then it's no longer considered insurance. For example, insurance protects something that has a risk of happening. If there's 100% chance that you will crash (like fraud), this is certainty and there is no risk = no insurability.

Let's discuss how each factor is analyzed:

1. This is most often done with a book. If your vehicle is a classic or highly modified, you will need an appraisal. 99% of cars' value will be based on book value.

2. The insurer will only insure against certain risks, like accidents. Most insurers will not insure against intentional fraud. This area is highly regulated by state law.

In order to gauge the risk of an accident, they look at everything: criminal history, driving record, credit report, employment history, age, sex, gender, location, income, mileage, year/make/model, etc. Every company has a unique algorithm to determine risk based on hundreds of thousands of variables.

3. Insurers insure large numbers of people. Statistically, not everyone will have an accident. By spreading the risk over the large population, any one person will be covered by the group. The premium is calculated based on your risk profile and what the insurer needs to cover its costs.

4. This is highly regulated by state law. Generally they will pay you up to 80% of your car's pre-accident value. Anything over that is considered a total loss and they will pay you the book value of the car.


What you can do to save money on car insurance:

1. Be aware of the car you drive. Year/make/model/mileage is the single most important variable. Beware of optional equipment as well. Generally the more expensive the vehicle, the more it will cost to insure.

2. This area is intuitive. Stuff like keep a clean driving record, go to your court dates, etc. But there are also stuff like cleaning your credit report, fixing your DMV record, paying back taxes, etc. anything that can stay on your record. All these things affect what insurers perceive as your risk profile.

3. Figure out what each line coverage means and determine if you truly need them. There are 3 major coverages:

liability - pay other for your mistake
collision - pay you for others' mistake
comprehensive - pay you when your vehicle is parked

Picking the right coverage needs to be discussed with your insurance agent. It boils down to how much risk you're willing to take, and how much you're wiling to pay based on what you're covered for.

4. Filing a claim is a different process than underwriting and I will save that for later.


As you can see, there are hundred of thousands if not millions of variables for each person. Each insurer has a computer that calculates the premium based on your coverage.

That is why it is not beneficial to ask people what they pay for insurance. What others pay has no relevance to you whatsoever because there are so many variables that are different between each person. The only thing that matters is how much they charge you based on the coverage you want. Just because one company is cheaper for someone else doesn't mean that company is cheaper for you.


Short thread, I know, but not too much is known about how each company rates people.

Any questions on why you pay what you pay for insurance?