Why is my premium what it is?

Posted On March 6, 2011

You have just asked our Most Asked Question!!!  Why are my premiums what they are?  How do they come up with premium charges?  Why do premiums keep rising, even if I don’t have an accident?

Every day, we receive telephone calls in our office asking a wide variety of questions concerning your insurance coverage, your policies, and most often, why your premium is what it is! I’m going to use this opportunity to try to answer that question, at least with respect to automobile insurance.

Owning and driving an automobile is an expensive necessity, and our vehicles cost us a lot of money. Vehicles can do a lot of damage; they can kill and seriously injure our passengers, ourselves, pedestrians, and passengers of oncoming traffic. Each time we get into an automobile, we risk causing an accident that could result in such death or injury which could bankrupt us, as individuals, for the rest of our lives. If we had to assume that risk ourselves, we couldn’t afford to drive an automobile; because we couldn’t afford to subject our income, our homes, and our savings accounts now and forever into the future to pay for damage that we caused to innocent parties.

Regardless of whether we have accidents on a regular basis, or if we’ve been fortunate enough to driver 20 years without causing an accident, each time we enter our vehicle, we are at risk of doing so today. We buy Public Liability Auto Insurance because we can’t afford to assume that risk ourselves.

All automobile drivers who maintain Public Liability Insurance, contribute their fair share into a “fund”, which then becomes available to those unfortunate members who have caused an accident resulting in injury or death to innocent parties. Your contribution to the fund is your PL & PD premium, and the base rates are calculated, not on your own specific driving record, but on what the entire “fund” is likely to require in the next year for the payment of the claims that you might cause, and should you be the unfortunate party that causes an accident resulting in death or injury, that fund is available to you, up to the limit you insure.

All the licensed members of your household are classified, and your base premium into the “fund” is calculated. Some “classes” of drivers routinely and regularly take more from the fund than others and if you, as a driver, belong to that “classification”, your base contribution is higher than your fellow driver. Vehicle usage, number of times you have used the fund in the past 6 years are two important factors that help determine if your own contribution to the “fund” should be greater or less than another driver of the same classification, but even if you have never caused an accident, the “transfer of your personal risk” and the ability to utilize the fund does cost a premium each year, and that premium does indeed go up on a regular basis.

It goes up because the total amount of claim payouts for your particular classification has increased. Inflation takes it’s toll. Breakthroughs in medicine permit injured people to live longer lives and this incurs extra costs in claim settlements. The courts award extremely high settlements, much higher than in past years, and therefore, even if you haven’t had an accident, the risk becomes higher, because if you do, the claim will be much higher than it was 10 years ago.

Why all licensed drivers?

Because you are buying your public liability insurance for your “vehicle”, and the liability coverage goes with the “vehicle”, not the “driver”. Any person who has the opportunity to enter the vehicle and drive it would be covered under the policy, and the law as it currently stands does not permit insurance companies to refuse to pay a third party claim, simply because we were told that someone would not be driving. The risk is there, and although you may be disenchanted about paying a premium for an individual in your household who is unlikely to drive, you will be grateful if that day should arrive when someone does drive, for some reason or another, has an accident and there is a judgment of several hundred thousand dollars!

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