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What is an Insurance Actuary?

Written by W. Lane Startin. Posted in Definitions Last Updated: 06/11/2013

What the insurance actuary does, how car insurance premiums are calculated and how discounts are added later.

It's dry work, but someone has to do it.

You get your car insurance bill every month and pay it without question. It’s what the agent said you’d pay, right? So you do it.

But have you ever thought about how those premiums are actually calculated? Who’s in charge of that, anyway? As it turns out, there is a department in the insurance company responsible for just that.

Imagine that.

Meet the Insurance Actuary

Auto insurance is a business heavily dependent on statistics. It therefore follows that a statistician is somewhere in the mix. Enter the insurance actuary. Like an adjuster, an actuary is an insurance company employee or third party contractor who is never an agent. Instead, he or she has a specific job for the company: analyze loss data and determine premium accordingly.

While it’s true that the insurance company board and the state insurance commission have to approve premiums, it’s nevertheless the actuary who has the most say in how much gets charged for car insurance. The actuary almost never interacts with the public and rarely gets a lot of credit, even among insurance agents, but the job he or she does has a profound impact on not only how much you pay for insurance, but ultimately on how much the agent makes in commission.

How Auto Insurance Premiums are Calculated

As the auto insurance industry has evolved over the past century or so, it has looked at more and more variables when it comes to pricing its premiums. Today it’s not unusual for auto insurance company actuaries to consider thousands of variables including varying degrees of age, geographic location, make, model and so on. This shouldn’t surprise many people.

In other words, an actuary will look at loss history in a particular county or ZIP code for a particular demographic driving a particular type of vehicle, and do it again and again. Yes, it’s dry work, but the insurance companies consider it absolutely vital. The same actuarial work, by the way, is also done for every other type of insurance, including homeowners, commercial, life and all other lines.

What might surprise people is that auto insurance companies only look at their own loss histories. In other words, State Farm isn’t concerned with the loss ratio seen at Farmers in a certain area, or vice versa. It’s therefore theoretically possible for rates to be significantly higher in one area for one company over another because one company experiences significantly higher losses. This is one reason why auto insurance rates are different from one company to another all other things equal.

How Discounts are Factored In

Actuaries work exclusively with a base premium calculated before any discounts are factored in. Given that in today’s competitive car insurance market just about everyone qualifies for at least one car insurance discount, it’s therefore unlikely you’ll actually pay what the actuary says you should. Car insurance companies know this and build the discounts around the actuarial premiums accordingly.

What the insurance actuary does, how car insurance premiums are calculated and how discounts are added later.

You get your car insurance bill every month and pay it without question. It’s what the agent said you’d pay, right? So you do it.

But have you ever thought about how those premiums are actually calculated? Who’s in charge of that, anyway? As it turns out, there is a department in the insurance company responsible for just that. Imagine that.

Meet the Insurance Actuary

Auto insurance is a business heavily dependent on statistics. It therefore follows that a statistician is somewhere in the mix. Enter the actuary. Like an adjuster, an actuary is an insurance company employee or third party contractor who is never an agent. Instead, he or she has a specific job for the company: analyze loss data and determine premium accordingly.

While it’s true that the insurance company board and the state insurance commission have to approve premiums, it’s nevertheless the actuary who has the most say in how much gets charged for car insurance. The actuary almost never interacts with the public and rarely gets a lot of credit, even among insurance agents, but the job he or she does has a profound impact on not only how much you pay for insurance, but ultimately on how much the agent makes in commission.

How Auto Insurance Premiums are Calculated

As the auto insurance industry has evolved over the past century or so, it has looked at more and more variables when it comes to pricing its premiums. Today it’s not unusual for auto insurance company actuaries to consider thousands of variables including varying degrees of age, geographic location, make, model and so on. This shouldn’t surprise many people.

In other words, an actuary will look at loss history in a particular county or ZIP code for a particular demographic driving a particular type of vehicle, and do it again and again. Yes, it’s dry work, but the insurance companies consider it absolutely vital. The same actuarial work, by the way, is also done for every other type of insurance, including homeowners, commercial, life and all other lines.

What might surprise people is that auto insurance companies only look at their own loss histories. In other words, State Farm isn’t concerned with the loss ratio seen at Farmers in a certain area, or vice versa. It’s therefore theoretically possible for rates to be significantly higher in one area for one company over another because one company experiences significantly higher losses. This is one reason why auto insurance rates are different from one company to another all other things equal.

How Discounts are Factored In

Actuaries work exclusively with a base premium calculated before any discounts are factored in. Given that in today’s competitive car insurance market just about everyone qualifies for at least one car insurance discount, it’s therefore unlikely you’ll actually pay what the actuary says you should. Car insurance companies know this and build the discounts around the actuarial premiums accordingly.

What is an Insurance Adjuster?

Written by Todd Clay. Posted in Definitions Last Updated: 03/14/2011

Three different types of insurance adjusters and how they are involved in the claims process.

A Collision Repair Estimate for an Insurance Adjuster

An Insurance Adjuster works off an estimate to pay for damages.

What is an insurance adjuster and what exactly do they do?

Insurance adjusters have one of the hardest jobs in the insurance industry.  They are responsible for making sure that an insurance company’s legal obligation to their insured is satisfied by paying out legitimate claims that the insured may have.

They also try to offer an acceptable offer of repair or settlement to the insured or other party and at the same time trying to keep the cost of the claim low so that the insurance company can still make a profit.

Property Damage Insurance Adjusters

An adjuster in the field of property damage views the amount of damage done to a vehicle or other property and then assigns a monetary value to it.  Most times in the case of a car accident the damage assessment is actually done by a body shop and then they submit their estimates to the adjuster for payment.  The adjuster reviews the estimate to make sure that the damage being fixed pertains to the accident, the work being done is restoring the vehicle to the condition it was in prior to the accident and not improving the vehicle and that the prices for the parts and labor are acceptable.

The assessment of damage done to a home is similar to the way damage to a vehicle is assessed and paid.  The only difference between a vehicle and home is that most of the time it is the adjuster that comes out to assess the damage to a home — not the contractor that will be doing the work.

In the case of a theft, the adjuster is given a list by the insured of what items are stolen and they are responsible to make sure that the items are covered under the policy that the theft is being claimed under.  They also research the value of each item to compile a payment that is made to the insured for the current value of the items or replacement value, depending on the type of coverage that the insured paid for with their policy.

Bodily Injury Insurance Adjusters

A Bodily Injury Adjuster is responsible for the injuries that mostly arise out of an auto accident, in some cases it can also be a homeowner’s insurance claim in the case of an injury from negligence.   They gather medical bills, assess treatment making sure that it is relevant to the injury that the insured is accused of causing and then at the end of treatment settling the claim.  They also work on the medical bills for the insured or other injured parties that were in the insured’s vehicle at the time of the accident, if the insured has the coverage.

Settlement for a bodily injury claim is not just adding up the medical bills and making payment on them.  It also includes a monetary amount for pain and suffering that was caused by the accident.  The settlement of the pain and suffering part of the claim is where there is usually the most disagreement.  The insurance company does not want to pay out more than it has too and the person that had the injury is feels that their pain and suffering is worth more than what is offered.

If the injured party and the adjuster cannot reach an agreement through their own negotiations, legal counsel is called in and the settlement is either negotiated then or it heads to court.

Provisional Car Insurance for Drivers with Provisional Licenses

Written by Todd Clay. Posted in Definitions, Research Last Updated: 03/23/2011

What license requires provisional car insurance, what it really is and how can you keep the rates lower for this type of coverage.

Application for a Driver's License

Applying for a provisional driver's license means you are ready to drive alone.

Provisional car insurance is a bit tricky.

Provisional insurance is not an actual insurance policy for a vehicle, it is extra coverage for a new driver that holds what could be considered a “learners license”.

The License that Requires Provisional Car Insurance

Provisional car insurance is for drivers that hold a provisional license.  A provisional license can be held by either a new teen driver or a driver that has had their unrestricted license revoked due to bad driving activity.  Because most provisional licenses are held by new teen drivers, that is the provisional license group we will concentrate on right now.

In the past it used to be that a new driver went straight from a learner’s permit to a driver’s license once they had reached a certain age or successfully completed driver’s education.  Today, a number of states require a new driver to earn a provisional driver’s license.

A provisional license adds a restricted step in between a permit and the freedom of a driver’s license.  It requires that the new driver gain additional experience behind the wheel without having to have a licensed driver in the vehicle like a permit, but with added rules that are not required with a regular driver’s license.  These can include rules such as: a driving curfew, driving during daylight only, or restrictions on who will be allowed to be in the car with the provisional licensed driver.

What Provisional Car Insurance Really Is

As we already discussed, provisional car insurance is not a policy in itself, it is just the insurance coverage that is available for a new driver with a provisional license.  It is needed because the driver with the provisional insurance is an increased risk for your policy and the insurance company wants to make sure that they are collecting the extra premium needed to cover the increased chance that one of your vehicles will now be in a car accident due to this driver.

Not all insurance companies have specific provisional insurance available to add, to find out how your insurance company will handle a new driver with a provisional license in your household contact your insurance agent.

Keeping the Rates Lower for Provisional Car Insurance

Adding a new driver to your insurance policy is expensive whether it is for provisional coverage or as a regular driver.  As new drivers are usually teens here are some tips on how to keep the rates down on your new driver.

  • Make sure that your new driver keeps their grades up to earn a good grade discount.
  • Enroll your new driver in an accredited driving course.
  • Notify your insurance company that your new driver has a provisional license and not a full privilege license.
  • If your insurance company insists on placing the provisional driver as a rated driver on one of your vehicles, have your new driver driving your oldest and least expensive vehicle – if the company will allow it.
  • Check to see if you can cover your new driver with non-owner coverage.  This coverage is for drivers that do not have their own vehicle and rarely drive your vehicle.

Performance Car Insurance and the Car Lover

Written by Todd Clay. Posted in Definitions, Research Last Updated: 03/23/2011

What cars need performance car insurance, the options available and what you can do to increase your odds of getting coverage.

Performance Car Insurance and the More Powerful Engine

The potential for dangerous speeds is why performance cars are hard to insure.

It is said that Americans have a love affair with vehicles. And there is usually none more desired than the elusive performance car.

We love the look, the smooth feel of the body and the way our heart beat resets itself when the engine is revved.

But, what cars actually qualify as being labeled as a performance car and with how expensive these cars are, how does the owner make  sure that they have performance car insurance?

What Cars Need Performance Car Insurance

Cars that qualify as a performance cars all have one thing in common, a high performance engine.  So if you have a car that is all souped-up on the outside, has a killer paint job and modifications to the body, but the engine belongs in a station wagon…you don’t have a performance car.

Performance cars have high horsepower engines (more so than a normal car), possible super or turbo chargers, can rev higher than a normal car and has specialized braking and suspension installed to handle the higher performance engine.

Performance Car Insurance Options

Insurance companies have a love-hate relationship with these cars.  They love it because it brings them the prestige of saying that they insure a higher class of car and also the premiums that a performance car can possible bring in for them.  On the other hand they hate them because if they have to pay out on a performance car claim, it is going to be exponentially higher than a claim that involved a regular vehicle.

Because of this insurance companies usually take one of two routes with performance car insurance.  One, the owner has the option to insure the vehicle the same way a classic car is insured.  This means that they have a cap on how much mileage can be put on the vehicle over the course of the year and the vehicle has to be kept in locked storage when not in use.

Two, the high performance vehicle is insured in a high risk market.  This doesn’t mean that the driver is a bad risk like most of the other drivers in this market are.  It just means that the insurance company feels that insuring a high performance vehicle, due to the high expense it would incur if damaged, is a high risk for them and they require a higher premium to be able to insure it.

Avoiding Roadblocks to Getting Performance Car Insurance

A performance car owner can do a number of things to make themselves more attractive to insure and also possibly keep their premiums at a decent level at the same time.

  • Wait to buy a performance car until you are 30 or older – the older more mature driver is a safer insurance risk for a company to take.
  • Make sure that your performance car is street legal- this means all safety equipment such as headlights, windshield wipers, a horn, etc., are all installed.
  • Don’t add modifications that an insurance company cannot inexpensively replace if damaged- consult an insurance agent with the list of modifications you have added to your vehicle when getting a quote.  Some modifications will automatically get you an insurance denial by some companies.
  • Keep your driving record clean
  • Install an anti-theft device

All of these precautions may make insuring a performance car a little less costly when the insurance bill comes due.

Assigned Risk Auto Insurance

Written by W. Lane Startin. Posted in Definitions Last Updated: 02/05/2011

What assigned risk auto insurance is, who needs it, how to apply for it, and knowing when to leave it behind.

Too many incidents like this can result in assigned risk.

All drivers are legally required to have auto insurance, but not all drivers have perfect records. Insurance companies recognize this and work to manage their risk by catering to those with tickets, claims, points and other driving blemishes.

But what if you’re convicted of multiple DUIs in a short period of time, or if your driving record is otherwise so bad that you don’t qualify for insurance even with high risk companies? Can you still get coverage?

The answer is yes, but it’s not cheap.

What Is Assigned Risk Auto Insurance?

At the most general level, assigned risk insurance, also known as the “assigned risk pool,” is a state- or regionally-run program that allows people who can’t otherwise qualify to get legally required insurance due to get insurance. The assigned risk concept is most commonly associated with workers compensation and auto insurance. Obviously, we’re only going to talk about the auto insurance portion of it here.

Assigned risk auto insurance programs assign drivers to various insurance companies, which are then required to take them. There’s little choice in assigned risk. You’re compelled to take what’s offered, and the company assigned to your policy is required to underwrite it. Any company which refuses risks losing their privilege to do business in your state, therefore none do.

Although rates and coverages for these policies are dictated by the assigned risk pool rather than the insurance company, they are still very basic and quite expensive. SR-22 filings are included.

In recent years more and more high risk and non-standard auto insurance companies have entered the market. This means that only those with truly awful driving records need assigned risk auto insurance. Indeed many agents will tell you an assigned risk auto insurance application is quite rare indeed.

Applying for Assigned Risk Auto Insurance

Your shouldn’t apply for assigned risk auto insurance unless you absolutely have to. Go through the application process through several different standard and high risk companies first. There is absolutely no point in saddling yourself with assigned risk auto insurance if you can get coverage elsewhere.

Remember, different companies look at different things when considering driving record. Therefore, while one company may consider you too risky, another may not. Also keep in mind companies look at driving records for different periods of time. Some are only interested in three years of driving history, while others will want to know about five.

If you find you do need assigned risk auto insurance, fill out the application with your agent and pay the necessary premium. The agent will then send the application to the pool where it will get assigned. Chances are good your policy will wind up with a different company than the one your agent represents.

Assigned Risk Is NOT Forever

The nice thing about auto insurance driving records is that nothing is forever. If one truly turns the page on bad driving habits, even the worst driver can shed his or her horrendous driving record and become any insurance company’s preferred customer.

If you do have an assigned risk policy, meet with your agent every six months or so to see if you can get qualified with a high risk or even a standard company again. There’s no reason whatsoever to stay on assigned risk even one day longer than you have to.

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