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Speaking in very general terms, the cost of your auto insurance will depend on three broad considerations: (1) those risk factors that insurance companies consider relevant in estimating the likelihood that your will be involved in an accident and make a claim, (2) the scope and amount of the coverage you purchase, including the deductible you choose (the greater the coverage you purchase and the lower the deductible, the greater the cost), and (3) to a surprising degree, the insurance company you choose to do business with. You can do your part to control your premium costs by addressing each of these these areas.

Risk Factors

First, let's take a look at the factors an insurance company uses to determine what kind of risk you, as an insured, pose. There are a great number of relevant factors. We can't consider them all here, and will look at only the most important ones. While all insurance companies consider each of the factors listed below, each company has its own algorithms, or formulas, to weight and access the various risk factors. As we look at each factor, we'll also consider how you might adapt or react to that factor so as to control your auto insurance costs.

          Risk Factor 1. Where you live. If you live in an area of high crime, including a high incidence of auto theft, insurers may charge a higher rate for comprehensive coverage, which includes theft insurance. Also, if you live in an area of high density where auto accidents occur with greater frequency, that will be reflected in your rates. Some states, including California, limit the weight that insurance companies can give to place of residence in setting rates. Adapt/react. Obviously you are not going to decide where to live based on auto insurance rates, but your place of residence may be a consideration in whether you choose to own a car and, if so, what kind of car you purchase. 

          Risk Factor 2. Personal factors. Insurance companies consider the number of years you have been driving, your gender and your marital status to be relevant to the risk you pose of being in an accident or otherwise submitting a claim. Age is also a big factor, but California restricts the use of age by insurance companies in setting rates. Adapt/react. Obviously you are not going to manipulate these factors to control insurance costs. I would not recommend that you follow up a proposal of marriage with the argument, "Hey, it'll reduce our auto insurance costs." While true - rates may be effected by as much as 5-15 percent - you don't want your future spouse telling that story at your 10th anniversary party. 

          Risk Factor 3. Your Car. The type of car you drive will be a factor in your insurance costs. There are two primary considerations at work here. More expensive cars, because they are more expensive to replace and repair, will attract higher premiums for collision coverage. Secondly, the overall safety of the car as well as specific safety devises related to accident reduction and theft protection may effect rates. But some caution is warranted here. Insurers assess safety ratings on cars and safety/theft protection devices differently. One insurance company may consider that, for example, an automatic braking system greatly reduces the likelihood of accidents and resulting damages, while another company may have collected data that suggests that automatic braking is not that effective, or perhaps that the additional expense built into the car by that device offsets the device's benefits. Adapt/react. Admittedly, the cost of insurance is probably not a significant factor when most people are shopping for a car. But I suggest that it is at least worth some consideration. And at a minimum, you should consider what safety or alarm features are available and check with your insurer (or potential insurers) to determine whether purchasing those features will help you in the long run with insurance costs.

          Risk Factor 4. Your driving record. This factor weighs heavily in any insurance company's assessment of risk. The more at-fault accidents and driving infractions (speeding, DUI) you have to your "credit" the higher your insurance costs. Adapt/react. This one largely is in your court. Drive carefully. Not only your safety (and that of your passengers) depends on it. So does your wallet. 

          Risk Factor 5. Loyalty. Some companies will offer a loyalty discount if you remain with them for a number of years. In other cases, your rates may inch up over the years with inflation and general rate re-adjustments. Adapt/react. Here you need to be proactive. Seek out companies that offer loyalty discounts - although be wary of higher initial rates. Reassess your coverage annually to determine whether your rates are going up for reasons outside of your control, and if so, start shopping around. (The same can be said for "packaging" - that is, discounts the some insurers offer if you purchase both auto and home insurance with them).

          Risk Factor 6. Credit Rating. Some insurers have collected data to show that a lower credit rating is associated with more frequent and higher claims. This is a controversial area. I mention it here only to assure those who have heard that their credit rating may impact the cost of their auto insurance. It won't. At least not in California, which is one of the few states that prohibits insurance companies from factoring credit rating or credit history into their premium algorithms.

Coverage Factors

Of course, the cost of your auto insurance is also determined by the amount and types of coverages you decide to purchase. In California, private passenger automobiles must have the following minimum coverages: $15,000 for injury or death to one person, $30,000 for injury or death to more than one person, and $5,000 for damage to property. You are not required to carry any collision insurance to cover the cost of damage to your own vehicle. Going with minimum coverage will reduce your immediate out-of-pocket insurance costs, but may also make it difficult for you to repair or replace your car in the event of an accident and may place you in financial peril if you are severely injured or if passengers or third persons are injured or killed in an accident. 

Deciding on the correct amount of insurance that you should purchase, including the appropriate deductibles for each coverage, is a complicated process - one that an independent insurance agent with knowledge of the industry and experience dealing with insurers and insurance policy terms can help you think through carefully. 

Insurer Pricing Variation

Here is the kicker. Many people don't realize that even after they have done everything that they can to reduce auto insurance costs in accord with the risk factors listed above, and even after they have carefully determined the optimal coverages, coverage amounts and deductibles appropriate for them, there is one last critical step they must take if they are to take control of their insurance costs. Consumers must carefully survey the market to find the insurer that provides the insurance product they want at the best available price.

Because the fact is that although all insurance companies carefully and exhaustively examine essentially the same risk factors and the same accident and claims data in order to determine the premiums they should charge, they come up with a surprisingly wide range of results. Prices vary a lot - more than enough to make it worth your while to shop around.

Huffington Post recently reported on a study that perfectly illustrates this point. The study assumed a 40-year old, unmarried male driver who commuted 12 miles to work each day and had a clean driving record. He owned a 2012 Honda Accord and purchased the following insurance: liability coverage with limits of $100,000 for a single injury and $300,000 for multiple injuries, property coverage of up to $50,000 in an accident, and a $500 deductible for collision and comprehensive coverage. This is a standard coverage package. The study compared insurance premiums charged to this hypothetical car owner by six large insurance companies in every zip code in the United States. The differences in premium costs were substantial. In California, the average annual premium charged by the six insurers was $1,428. (The national average was $1,277. Welcome to high cost California). However, the least expensive premium in California averaged $960, or 33 percent less than the average premium!

Conclusion. There are three things that you can do to control your auto insurance costs. First, where possible, react and adapt to the risk factors that insurance companies consider in setting insurance rates. In particular, drive safely and within the law. Second, choose insurance coverages, coverage amounts, and deductibles that are appropriate for your circumstances. Third, and this factor potentially will have the greatest impact on your insurance costs, check with a number of insurers to find out which one offers the product you want at the best price. You may be surprised at the range of prices that are available.

While the benefits of following this advice can be substantial, it can be a time consuming and head-ache inducing process. Consider consulting an independent insurance agent to assist you. An independent agent has the knowledge and experience to answer your questions about coverage and to offer useful suggestions on what coverages are right for you. In addition, because an independent agent does not work for a particular insurance company, he or she can be objective in searching out the best possible insurer for you. And this service does not cost you anything.

Pfeifer Insurance Brokers is an independent insurance agency. And we are here to help. Call or email us.

Alex Pfeifer
650 762-7080
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