Your vehicle gets older each year, but your auto insurance goes up every year. Why does this happen?
It’s logical to think that the opposite should happen, that if you have an older vehicle and have maintained a safe driving record, that your insurance should go down or at the very least stay the same.
This actually does happen sometimes, but these cases are few and far between.
How Does Car Insurance Work?
Insurance, by its very nature, spreads risk around across a large group of people. At a basic level, each person pays their premiums and transfers the risk of loss on their assets, in this case, a car, to an insurance company.
The insurance company takes the payment but also promises to pay for covered losses to any of their clients.
Insurance companies are able to project the number of losses they will have in any given year with a pretty good degree of accuracy. They use software that looks at historical data on the number of losses they have, as well as the amounts of claims money paid outs.
The companies then use this data to determine their premium rates.
Insurance companies are for-profit businesses, but they are also heavily regulated by each state’s department of insurance. This means that while their goal is to make money, they also have a lot of oversight and have to be fair to their customers.
Why Do Car Insurance Rates Increase?
What’s been happening in recent years is that the number of claims has been increasing. There are a few reasons for this, such as increased congestion and urban areas, longer commutes, and the big problem of distracted driving.
Distracted driving is mainly seen with people using their smartphones while their driving. However, it can also mean doing any activity other than paying attention to the road, which could include eating, drinking, or falling asleep.
On top of that, vehicles are more expensive to repair and replace. Part of this is simply inflation, but a lot of it is due to the fact that cars are more technologically advanced. With advanced sensors, Wi-Fi and Bluetooth capabilities, luxury items, as well as technologies that allow for partial or total self-driving, modern cars are a writing computer. This makes even the most basic parts very expensive to repair.
With the increased frequency of auto claims paired with the rising costs of those claims, most auto insurance companies are happy if they simply break even in any given year. Many of them are taking financial losses onto their personal auto book of business.
If a company reports a loss on their auto book of business, it is extremely likely that they will raise their auto rates for the next year to try to recoup some of those losses. They also have to plan for another year where they might break even at the best.
They have to take this into consideration when they are setting their rates each year. And since insurance spreads risk around across all of their customers, this means that you will also see a rate increase. You’ll see one no matter how good of a driving record you have or how old your vehicle is.
If you think about it, even though it’s unfortunate that your auto premiums go up despite having older vehicles, there’s not much of an alternative.
If insurance companies set their rates just based on each individual person, many people wouldn’t be able to get insurance. People the safe driving records might pay next to nothing further insurance, but if they have an at-fault claim that the company has to pay out over $100,000 on, the person likely would not be able to afford insurance again.
How To Keep Your Rates Low
Insurance companies try to offset this a little bit by offering individual-based discounts. Some of these include payment discounts, credit score discounts, safe driving history discounts, and telematics discounts. The many discounts offered by companies can help offset rate increases that companies have.
It is important to note that putting all that aside, insurance companies likely would still have rate increases from time to time simply to account for general inflation. The cost of living is going up in almost every category, and insurance is a part of that.
If you have a vehicle that is older than 15 years and your premiums are still going up, you can at least take comfort knowing that your insurance isn’t going up nearly as much as somebody that has a newer vehicle.
If it’s going to go up, it’s better to go up just a little, rather than a lot.