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How Rating Factors Affect Your Motor Insurance Premiums

Thu, 12/06/2014
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The price of car insurance can seem confusing and small changes can make a big difference to the risk presented to the insurer (and thus the risk as a whole). This guide will look at some of the most common ‘Rating Factors’ that insurance companies may look at:

Age

Age is a well known rating factor in motor insurance and most people are well aware that it has a large bearing on the premium. When the claims experience of different age brackets is looked at it is clear to see why this is:

 

 A Graph showing Claims cost, Average Premium and Claims Frequency against Age.[1]

Young drivers are normally analysed in 2 categories: 18-20 and 21-25, so a 21 year old may see a notable reduction in premium compared to when they were 20 (though age brackets used may vary). These reductions will continue as drivers move into lower risk age groups (though these reductions will become less noticeable). However the decreases in risk eventually reverse (according to the ABI data this occurs at the age of 71) at which point premiums tend to trend upwards.  

Address

Address is an important rating factor for motor insurance, in that the area where the vehicle is most used is assessed in relation to the risk it poses to the insured vehicle. Risks will include density of traffic in the area, how often claims are reported in the area, criminal activity (specifically, but not exclusively, motor theft and vandalism), and flooding risk amongst other factors. These risks are considerable and therefore the address  at which a policy holder resides can have a large impact on premiums.

For example, by processing 2 quotes on our system with 2 identical risks, and only varying the address, we discovered that a quote for someone living in Andover (a medium-sized market town) was less than half the price of a quote for the same person living in central Birmingham.[2]

In terms of the ‘risk address’ to use when taking out car insurance, it is important to declare the address where the vehicle is most frequently kept. If it is kept at 2 addresses then a dual postcode policy can be arranged by most insurance companies. It is important that the correct address is declared as failure to do so can lead to the insurance being declared invalid by the insurance company.

Driving Licences

There are multiple licence types that allow you to drive motor cars in the UK. These include full UK licences, licences to drive automatic (gear box) vehicles, provisional licences, EU licences and International licences.  Each licence type will statistically be made up of drivers who fit into certain profiles, and insurance companies will rate according to this. When transitioning from one licence type to another, it is important to notify your insurance company as they will likely use the licence type as a rating factor and an amendment to the premium may be required.

Motoring and Non-Motoring Convictions

There are two types of convictions that will need to be disclosed to an insurance company when applying for motor insurance: motoring convictions and non-motoring convictions (or criminal convictions).

Motoring convictions will need to be disclosed to insurance companies for 5 years, and if the convictions resulted in a ban then the 5 years begins from the date the ban ends (not from when the offence occurred).  Motoring convictions indicate to an insurance company a potential for the driver to be a ‘risk seeker’ and premiums will be increased dramatically if multiple offences occur within a short period of time (some insurers will only insure people with less than a certain number of convictions). Other considerations will be whether or not a conviction also relates to an accident.

Criminal Convictions will also have an effect on car insurance policies and the amount of time for which they must be disclosed varies from as low as 18 months[3], to needing to be disclosed for the rest of your life. The way that criminal convictions are looked at by motor insurance companies may seem peculiar in that a person convicted for murder may be charged a lower premium than someone convicted for fraud.  Whilst murder is a most serious crime it does not necessarily follow that a murderer will be more likely to make a claim on their motor policy, whereas those found guilty of fraud are regarded as more likely to attempt to deceive an insurance company when applying for insurance or making a claim.

Occupation

Insurance companies will look at statistics in order to set pricing and there are correlations between claims frequency/severity and the occupation of the policyholder. Consider the following example of 2 similar risks (with all other details such as address and policyholder’s age remaining the same) but one is a nurse and the other a professional footballer. The footballer would present a completely different risk to the nurse in that if they were to give a lift to a team mate who then suffered injury in a motoring related accident this could cause the insurance company to incur a very large claim payment. Whilst this is an extreme example it can be seen that considerations have to be given to all occupations.

Medical Conditions

Medical conditions come in many forms and severities and those deemed to impair a person’s driving ability will be deemed material facts by insurance companies. There are 2 main aspects to medical conditions that will primarily be considered. Firstly the stability of the condition: is it likely that the condition could deteriorate rapidly? If a condition is unstable then a sudden and severe onset of the medical condition could lead to an unavoidable traffic accident. The second aspect is medication. Certain medications can leave the patient’s senses impaired and/or increase drowsiness thus reducing reaction times and increasing the chance of an accident.

If you have a condition and are unsure whether or not it will be considered material, disclose it – failure to do so could lead to problems in the future. 

The Vehicle and its Performance

When trying to obtain cheaper car insurance there is an obvious first step. The vehicle itself will be a considerable rating factor and a good way to reduce risk is to acquire a vehicle that fits into a low insurance group. Insurance groups are not as straightforward as you’d think and just because a car has a smaller engine size doesn’t mean it’s in a lower insurance group (if in doubt, check!)

Value of the vehicle will also play a part in the premium and again this process is not as straightforward as you might imagine. For instance, many insurance companies’ charge higher premiums for very low value vehicles, as owners of such vehicles are less likely to exercise any degree of care towards the vehicle and this may lead to reckless driving and higher third party claims. Most insurance companies will have a lower limit on the value of vehicles they will accept for this reason.

Modifications to vehicles will also be a factor irrespective of whether or not the modification is performance enhancing. When vehicles are put into insurance groups this is based on the specification when manufactured, and any changes to this may move the group rating of the vehicle. For instance, applying body kits and alloy wheels to a vehicle might increase the chance of theft/vandalism. In terms of performance enhancing modifications the insurance company will want to know whether these were added by a professionally recognised garage and will want to assess exactly what effect this will have on the vehicle ( an increase in power or an increase in handling characteristics?). Another problem with modification to performance is that whilst enhancements that increase speed and/or acceleration are common; modifications to brakes, tyres, steering etc. are not, and therefore vehicles become less safe as the original specification of the braking system or suspension  is often inadequate to cope with any increased power.

Where the Vehicle is Kept

As well as the address that the vehicle is kept at, the parking facilities at the address will also be considered. Vehicles may be parked on a private driveway, on a road, in communal parking or in a garage. Almost universally, those parked in the road are the most expensive due to increased risk of theft, vandalism and being hit by traffic.                                                                                                                                                                      

Usually garages are considered to be the safest place for a vehicle to be kept as the vehicle is kept behind a locked door and out of sight from potential thieves and vandals. 

Private driveways are normally rated somewhere in between the risk of on-road parking and privately garaged due to the car being kept on the relative safety of private land but not kept locked up and out of sight.

Named Drivers

Named drivers will have many of the rating factors discussed here considered when adding them to the policy. For instance their age, claims history, convictions and medical conditions amongst others. It might then seem that adding drivers means adding risk – however this is not always the case.

If a named driver is added and after all the rating factors are taken into account, it seems that they are a lower risk than the policyholder, then the premium may decrease (as is common with young drivers who add their parents).

Adding other named drivers such as a spouse, civil partner or co-habiting partner to the policy, may also lead to reductions in premium.

Claims History

This is an obvious rating factor; a person with a high record of claims will incur a higher premium as they present a higher risk. High claims frequency is an indication of a risk seeking attitude to driving or a high exposure to a particular risk (possible a high car crime rate in their area).

Mileage

Mileage gives the insurance company an indication of the amount of risk exposure a vehicle will face (the more the car is used, the more chance there is it will be involved in an accident that may result in a claim). It will also be looked at in conjunction with other information (for example, a low mileage in a city may be considered a higher exposure than a medium mileage in a village due to traffic density). Mileage will also be considered alongside occupation to ascertain whether or not business use may be required.

Class of Use

The ‘Class of Use’ describes what the vehicle is actually going to be used for. The most common class of use is social, domestic and pleasure. Unless specified otherwise this will normally cover the use of the vehicle for commuting to a single, fixed place of work. There is a class of social, domestic and pleasure which excludes commuting and this usually attracts lower premiums. The reasoning behind this is that a commuter is likely to leave their car unattended for long periods throughout the working week in a car-park or on the road etc. whereas a non-commuter’s car will likely be left at home for most of the day. Commuting also tends to take place during peak travel times when traffic density is at the highest level which increases the exposure to risk of accident.

If a Proposer requires their vehicle for work (other than the commute to and from) then they will need to add business use to the vehicle.  This often increases the amount of time that a vehicle will be driven and this, coupled with the fact that people driving a vehicle during their working day tend to do so under deadlines and as such may be in a hurry (further increasing risk), results in a higher premium.

Voluntary Excess

From an insurance company’s perspective the more risk a Proposer is willing to take on themselves, the less risk the insurance company will be exposing itself to (therefore most insurance companies will offer cheaper premiums in exchange for higher excesses). 

A policy will almost certainly include a compulsory excess but it is possible to volunteer to accept an excess that you would pay IN ADDITION TO the compulsory excess. If you do this then it shows to the insurance company that you are not only less likely to claim, but that you would only claim for the  more severe accidents and in the event of a claim would be willing to cover an additional amount of the cost (all good things from an insurance company’s point-of-view).

Homeowner

It might seem strange that being a homeowner can result in a lower premium. This is definitely not universal practice but certain insurance companies will give discounts on motor insurance if the proposer is a homeowner.  When looking at the statistics, it does appear that homeowners (on average) have less frequent and/or less expensive claims.

No Claims Discount/Bonus (NCD)

NCD is not actually a rating factor (i.e. it is not taken into account when calculating the gross premium). However the application of NCD can often have a large effect on the actual premium charged, as discounts offered by insurance companies for NCD can be substantial. NCD is accumulated year by year by completing 12 month periods of claim free driving under an insurance policy. The more NCD a policyholder has accumulated the better risk they are perceived to be by the insurance company for two reasons - it is an indication of good driving history because they have had no [fault] claims and additionally they will be less inclined to claim as they will wish to preserve their NCD.

NCD can also be protected once a certain number of years have been accumulated (usually 4 or 5 years as a minimum, depending upon insurance company). An additional premium is charged for this benefit which allows a certain number of fault claims in a defined time period before the NCD is lost. Should a fault accident  occur the NCD would remain at the same level unless the permitted number of claims was exceeded. This added protection, however, does not mean that the premium will not increase, merely that the level of NCD remains the same. Therefore, whilst not being a hedge against inflationary rises or increases in premium due to claims experience, this is still a valuable protection given the monetary amounts and high percentage discounts involved.

Gap in Cover

Gap in cover relates to a period of time between the expiry of one policy and the inception of another when a person apparently has no insurance cover in their own name. This can result in higher premiums, particularly if a person’s NCD has expired. For instance, a person with full NCD may stop driving for 4 years and when they resume driving, their NCD would have expired and they would start again with no NCD. This arises from the fact that it is market practice in which  NCD is only  valid for a period of 2 years from when it was last used. policy.

Even if the gap in cover is relatively small and NCD hasn’t expired, an insurance company may still question the reason for the break in cover. Insurance companies are usually suspicious about such breaks in continuous cover as of course the period for which no insurance proof is being offered may, in fact, be a period during which serious claims occurred that the proposer is not willing to disclose.


[1] ABI data study (2011) - https://www.abi.org.uk/Insurance-and-savings/Topics-and-issues/How-insurance-is-priced/Risk-pricing-characteristics/Risk-pricing-and-age/Age-and-motor-insurance

[2] Based on quotes for a 38 year old; sales assistant in retail; driving a Vauxhall Vectra with 5 years NCB. Post codes used were SP10 and B1.  

[3] 18 months would be the time a minor would required to disclose a criminal conviction they received which only resulted in a fine.

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