How do car insurance companies decide rates for new drivers?

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How do car insurance companies decide rates for new drivers?

Getting your license is a rite of passage – for teens and their parents. No more getting picked up in a lame minivan while you’re #Snapchatting, right, kids? And, more importantly for parents, no more trips back and forth for soccer practices or One Direction concerts or whatever kids these days like.

The problem with all of this? Well, it’s pretty expensive to get auto insurance for new drivers.

Adding a teenage driver to your plan can raise your rates by nearly 80%. Compare that to adding a spouse to your policy, which can actually lower your rates since married people are less likely to be in an accident, and it makes the increase even more pronounced.

Since simply forgoing auto insurance isn’t really an option in most states, you either have to pay up or tell Junior that he needs to wait a few years before he can start cruising. Since the latter might be more painful than just ponying up the premiums payments (do you really want to give a teenager something else to complain about?) shouldn’t you at least know why what you’re paying for is so expensive?

How auto rates are set

So how does an insurer set rates for a driver if they’ve never driven before? They use a number of factors based on other drivers to find out just how expensive a new driver would be to insure. In fact, that’s how auto insurers decide on insurance rates for drivers in general.

Some of the factors used to decide on an insurance rate are:

  • Coverage – Just like with other types of insurance, the scope of the policy you choose will determine how much you’ll pay for it.

  • Driving record – Your license status, traffic violations, accidents, and so on play a big role in your premium prices.

  • Location – If you live in New York City, you’ll pay more for car insurance (and everything else) than in, say, a small Montana town.

  • How far you drive – The more you drive, the more chances you have to get into an accident.

  • What car you drive – Some cars are more expensive than others. That’s why premium brands exist. But those cars are also more expensive to insure. Plus, faster cars are better at enticing drivers to drive recklessly.

  • Credit score – This is less important for new drivers since they’ll likely be on their parents’ auto insurance plan, but a good credit score can mean big savings.

  • Personal information – This includes things like your age and gender. Men accounted for 71% of all car accident-related deaths in 2012, and they’re more likely to drive drunk and without a seatbelt than women.

Why are new drivers so expensive to insure?

Dear new drivers: your auto insurance costs so much because you suck at driving.

Okay, maybe not you specifically, but definitely "you" in general.

Remember, insurers pull information about similar drivers to help set car insurance rates. They use aggregate data to know that women are less likely to get into accidents than men, and young people are more likely to get into more accidents than more experienced drivers. That’s why car insurance rates tend to decrease as you age – until you hit age 65, when they go back up.

That’s how insurers know that teenagers are terrible drivers. They’re statistically more likely to speed, tailgate, and not wear their seatbelts. The Insurance Institute for Highway Safety notes that teenagers have a higher crash rate despite driving fewer miles than adults; the probability of dying in a crash is higher for teenagers than it is for drivers just a few years older.

New drivers are judged by the same criteria as other drivers – comparing them to similar drivers – but, in their case, the similar drivers just aren’t that good, and it ruins it for their peers.

How you can lower the insurance cost for new drivers

So it’s all terrible and we should put off giving driver’s license to people until they’re old enough to run for President, right?

That’s not a terrible plan, but in the meantime there are ways new drivers can save on auto insurance.

First, they should avoid getting into accidents. (Insert "duh" here.) This is good advice on several levels, but a good driving record means an insurer won’t jack up rates. Plus, some insurers will offer "good driver discounts" to reward...well, good drivers. The same goes for traffic violations; not only will drivers save on car insurance, but they’ll avoid ticket fees at the same time.

It’s worth mentioning that if you’re a parent, you should avoid accidents and violations, too. Getting points on your license can raise your rates, and some insurers will increase rates for accident claims of any amount, and even if the accident wasn’t your fault. Keep your rates low and set a good example by being a responsible driver yourself.

Second, new drivers should get a reasonable car. This will be relative to the driver, of course, but something with good safety features and a high crash test rating is a safe bet. Teens can suffer with a sedan for a few years in order to keep their rates low.

Third, look for student driver discounts. We’ve learned that insurers use stats to set their rates, and one of those stats is that students with good grades are better drivers. That means if a student can keep their grades up, some insurers will reward them with lower rates.

Similarly, some car insurers give discounts for completing driver’s ed courses, so new drivers can hone their skills and save money at the same time.

Finally, parents should put their kids on their auto insurance policies. It’s almost always cheaper to bundle policies than it is to have a separate one for their kids.

It’s fun to tease new drivers – they’ll get their chance in a few years when they’re old and grumpy – but getting the right auto insurance for them is important. You want to offer enough protection while still not completely breaking your budget. Knowing why new driver insurance is so expensive and how you can reduce those costs can go a long way in making sure you get them coverage you can afford.

Image: Ben Grey