How Are Insurance Rates Determined?
Insurance carriers (also known as insurance companies) are regulated by the state government, the Department of Insurance (DOI). The DOI does such things as license insurance agents, investigate consumer complaints, decide which companies can do business in the state (they must be financially sound and their products approved). Hardly anyone jumps for joy at the thought of paying for their insurance. Oh, I suppose some do—those folks who have had trouble getting a policy for one reason or another, well maybe they will jump for joy and wring the insuring agent's hand till it falls off, but most, including me, look at it as a necessity of life.
Everyone complains about the price of insurance. Insurance seems so intangible. It seems you pay for nothing. Pay some money and if you have an accident you're covered, but if you don't, well no one sends your money back. Basically, you pay the insurance company to take a bigger risk for you—i.e. that your $200.00 6-month auto premium releases you from the obligation of paying a certain higher amount (say $15,000 each person/30,000 each accident bodily injury) during that six month period if you are involved in an accident. It also allows you to legallyoperate a motor vehicle because insurance is the law. Still folks don't like paying insurance and when they get a rate increase they only dislike it more.
First of all, insurance companies can't charge what they please. They need to present to the Dept. of Insurance their proposed rates, and they must also submit their financials. If the Insurance Commission sees no increased expenses or losses, well, the rate increase is denied. Insurance companies take in huge sums of money and also pay out huge sums of money. I had an accident about 10 years ago. I'd been with the insurnce company for about 3 years and maybe they'd collected $2,500 premium off me—minus operating costs, postage, underwriting, etc. They paid out $12,000.00. I didn't get nonrenewed (the loss was apportioned, meaning we were both deemed at fault), but my rate went up the next renewal because I was charged for an accident.
Insurance companies must submit to the DOI a list of the factors they will use to compute rates. They cannot discriminate, but can use factors based on sound actuarial principles: age of driver (more losses statistically occur with under 21 and over 70 year old drivers than middle aged ones. They can rate according to gender (losses have shown males have more losses than females). They can charge more for different zips if they have more losses in any of them to justify the rating factor, etc. They can give discounts if you are part of certain employee groups, have other business with them or are a good student.
There are many factors insurance companies use to determine premium, but they all must be approved by the department of insurance, and insurance companies are not allowed to "gouge" meaning charge too much—they must charge rates based on money taken in and money paid out. Period.