Auto Insurance - Who Deserves The Lowest Premiums?

By Author: Marcus Stalder
Total Articles: 491
Comment this article

One of the more reassuring myths we have today is that it's always possible to achieve certainty. Even if it's only being wise after the event, we can always tell who was at fault, who deserved to win, and so on. This gives us all a pleasant feeling of security. If we feel someone somewhere is in control of "things", we are trusting and more confident "things" will turn out right. Except, of course, there's no such thing as absolutely certainty. As anyone with even the vaguest interest in sports or gambling and setting odds will tell you, everything can work out different to what you expect or hope for. So never assume the insurance company knows everything. Yes, they employ these actuaries who work out all the statistics and come up with probabilities. This allows the insurers set general premiums for classes of drivers. These actuaries comb through all the records of every traffic accident. They know who was driving what vehicle at the relevant time, what the road conditions were like, and so on. Adding them all together gives them the right to say younger drivers have the most accidents so they should pay the highest premiums.

Except ...
... we should ask whether this is fair. At some point, we are all learning to drive. Equally, we are all going to get old with poor eyesight and slowing reflexes. We can all be distracted at the wrong moment. Every vehicle can have a mechanical failure and deprive us of the ability to slow down or steer where we want to go. So, if the insurers wanted, they could put everyone in the same class as "drivers" and average out the cost of loss between everyone. This would set a "fair" premium. Everyone would pay the same for the right to drive on the roads. In this, the good drivers would be subsidizing the bad, the lucky drivers the unlucky, and so on. What could be more fair than that?

Ah, but you are now up in arms. This is socialism/communism! It's redistribution! It's punishing the good drivers by making them pay for the freeloading bad. You say the fair system takes every driver as an individual and asks what vehicle he or she drives, how many miles a year will be covered and at what times of the day, and so on. The individual takes responsibility for his or her driving and never pays anything towards anyone else's liabilities. Actually, that describes self-insurance where you pay all your own liabilities out of your own savings. All insurance groups people together and shares the risk. That's why grouped premiums are lower than an individual's costs should there be a claim. So, auto insurance companies strike a compromise. They group similar drivers together and share the cost of loss between them for the general premium. Then the insurers increase or decrease the rate depending on the actual driving record. This means young drivers will pay the highest premiums of all groups, but the best young drivers will pay less than those who manage to hit trees or other moving objects.