Why Do Car Insurance Premiums Change Over Time?

Last Updated on February 20, 2020

If you have been driving for a while, then no doubt you’ve experienced just how variable car insurance rates can be. One minute they’re rather reasonable and the next, you’re paying through the nose.

For the same policy, with the same vehicle, and with the same parking arrangements.

What’s going on?

How Auto Insurance Rates Are Calculated

To understand why car insurance premiums can change, it’s important to consider the different factors that go into calculating them.

Essentially, the job of a car insurance company is to calculate the risk/reward ratio of its investments. This works just the same as if you or I were to invest our money into stocks and shares.

A car insurance company will agree to pay out for accidents if they happen and when that happens, they may actually lose money from that particular customer for the year. They manage to stay in profit by making enough money from everyone else that they can absorb that cost.

Their ideal scenario is that you take out car insurance, pay into your account for life and never have an accident. That way, you have earned them money but you have never cost them anything. They have thus made a 100% profit from your premiums!

For this reason, some people are much more appealing to an auto insurance company than others. A middle-aged lady who never uses her car other than going to the local shop is an ideal customer for them. They want to attract her to their service and that means they need to offer competitive rates – more competitive than the other insurance firms she might have looked at.

Conversely, a young male who has only just learned to drive and who has already got two speeding tickets is a far less desirable customer. They don’t really want his business and they’d only consider him if he was paying a large enough premium to make it worth their while.

Fluctuating Algorithms

But most customers don’t fall into either of these categories and are instead somewhere along the spectrum. The job of the insurance company is, therefore, to try and identify how much of a risk they represent and then to charge them accordingly. And to do that, they have to look at national statistics.

How likely is a 34-year-old male, living in X location, driving X vehicle to crash their car?

Of course, these statistics change over time as more data is collected. If more people that fall into a certain demographic have accidents, then that group becomes harder to insure. Or if there is a long period where there are no accidents, they might become statistically less likely to have an accident and therefore cheaper to insure!

Some companies will literally check this data live every time you ask for a quote, meaning that it can change in the space of days or even hours.

Other Factors That Affect Quotes

But that’s not all that can impact the price of your quotes either. Other factors include the market. For example, if the market is very competitive and there are lots of other companies offering insurance at very low rates without that much business to go around, then this will drive down the prices of quotes. To make money, auto insurance companies, of course, need customers and that means they need to offer good value compared with their competition. Conversely, if the market is very good and there are plenty of customers, then rates don’t need to be so competitive and the companies can charge less per head.

But of course, you also need to consider that the more customers the insurance company has, the better off it is. Because insurance companies operate on the economy of scale (the more numbers they have, the more their profits add up), that means that they might have to charge more if they don’t have enough customers and therefore aren’t earning enough to stay afloat!

Again, companies will constantly be looking at these numbers – the stats of the market as well as their own finances – and then altering their costs appropriately to suit.

Deals and Cookies

It’s also worth noting that companies can actually use little ‘tricks’ to try and get the most from their customers or to increase sales. A discount or special offer, for example, can be used to attract more customers and this might, in turn, result in the quotes being lower for a short time.

Many insurance companies will also offer to sell their policies for less if you take them out online. That’s because there are lower overheads for the company if you don’t deal with a customer service representative and the company can thereby pass those savings on to you!

Finally, insurance companies often use cookies in order to charge returning customers more. The idea is that when you go on the site and look for car insurance quotes, the site will save a small file on your computer called a cookie. That cookie will then be recognized by the browser the next time you visit the site, which means that the insurance company now knows that you’re interested in taking out insurance with them.

And for that reason, they might be able to charge you more than they previously would have done and not risk driving you away!

How to Get the Best Deal

With all this in mind, it’s clear to see that you need to be vigilant in order to get the best deal. That means making sure to browse around and check different sites but also to try changing the details you enter – you can change your repayments for example so that you’re paying monthly or yearly, or you can change the type of coverage you need (third party, or fully comprehensive). Always browse in private and use price comparison sites so that you can see which company offers the best deal for you at any specific point in time.