Pricing factors of auto insurance include the make of the car, age of the car, whether the car is driven to and from work, age and gender of the driver, marital status, and location of the car. The location is critical because in some markets, insurers are pulling out due to large losses. These factors are underwriting factors. Additionally, the driving record is an important factor in classifying a driver as a preferred driver or substandard risk. The industry uses the data presented in Table 14.1, “Average Expenditures on Auto Insurance, United States, 1997–2006” and Table 14.2, “Auto Insurance Claims Frequency and Severity for Bodily Injury, Property Damage, Collision, and Comprehensive, 1998–2007”^[252] in the introduction to this chapter. Fraudulent claims also affect rates; see the box “How to Combat Insurance Fraud?” for a discussion.

Data show that younger drivers and male drivers cause more accidents. In 2006, drivers age twenty-one to twenty-four were responsible for 11.2 percent of accidents with fatalities and for 10.7 percent of all reported accidents. For drivers age twenty and younger, the ratios were alarming, with 6.4 percent of the driving population responsible for 13 percent of the fatal accidents and 16.6 percent of all reported accidents. The data are from the National Safety Council, as cited by the Insurance Information Institute. The national safety data estimated that there were 202.8 million licensed drivers in 2006; 50.1 percent of them were male who accounted for about 74 percent of all accidents with fatalities and 58 percent of total reported accidents.^[253]

The general public’s perception is that auto insurance rating is unfair. California drivers decided to take matters into their own hands and in 1988 passed Proposition 103, legislation that set strict guidelines for insurance pricing activities. Proposition 103 also called for an elected insurance commissioner and provided that commissioner with expanded powers. A major selling point of this legislation to voters was the imposition of limitations on insurer use of geography as a rating factor. Specifically, Proposition 103 requires insurers to set prices primarily based on driving record, years of driving experience, and annual miles driven. Insurers are further restricted in their ability to incorporate age, gender, and zip code in their rating process.

It is important to note that there are also discounts for drivers, including ones for good students, nondrinkers, second car, driver training, and safety devices. Furthermore, having more than one car and not using it to drive to work but for pleasure use only is cheaper than driving the car to and from work.

As noted in Chapter 13, Multirisk Management Contracts: Homeowners, which discussed the homeowners policy, regulators in each state created well-designed booklets that inform consumers of the specific requirements in their states and the different rates for a typical automobile in many major locations. When purchasing auto insurance, it is advisable to read the booklet or explore the Internet for the best rates and the rating of insurers.