Whether peddled by a witty pitchman or a lizard, car insurance is a commodity that most individuals legally require if they hope to operate a motor vehicle in the U.S. or Canada. This has led many to feel that car insurance is a buyer's market, giving the consumer the power over the insurers. By knowing how insurance works, how rates are determined and how you can maximize your rate, you will be able to shop more effectively.

How car insurance works

Many people will call their insurance company after receiving a renewal observe. After managing to forget about car insurance for the rest of the year, the renewal notice arrives and informs you that your premium will be increasing soon. Your response is natural, you call the insurance company and want to know why your rates went up when you are accident free and have never had a speeding ticket.

Insurance is a shared risk. The premiums that you and I pay is kept in reserves and used to pay the claims of our fellow customers. When you or I need to file a claim, that claim is paid out using money from the same reserves. The problem arises when claim frequency increases or when the amount paid out in claims begins to rise. This information is analyzed for trends. If, for example, claims tend to be more frequent among individuals who like the color blue, then the rates for individuals who like blue might rise (if the state were to allow it).

Rating, Tiering and Surcharging

Everyone begins with a base rate. This rate is determined based upon statistical information for a particular location (usually zip code). This rate is the same for everyone, regardless of age, sex and driving history. This rate increases through tiering and surcharging. Though this varies from state to state, most insurance companies have a tiering structure. Here's how it works. Insurance Company A rates clients based upon 50 tiers. Clients at Tier 00 will have the lowest rate. This will be based upon factors which are approved by that state's insurance department, and may include marital status, age, gender and driving history. Accidents and moving violations can be surcharged, adding to your premium. Most states allow insurance companies to charge for any accidents or violations which occurred within the last three years. However, even if a company stops surcharging for an accident, there are quite a few states that allow a company to sight back 5 years and use accidents and violations for the purposes of tiering.

Credit Reporting

Most insurers also use a Credit Based Underwriting Collect. It is important to note that insurance companies do not typically pull credit reports. The Credit Based Underwriting Catch is obtained when the insurer develops a formula which they then provide to reporting agencies such as Experian. Using the provided formula, the reporting agency then provides the insurer with a numerical score. This is necessary to note because while this score affects your rate, those within the insurance company most likely have no idea what makes your score. Neither customer service, nor underwriting will have a copy of your credit report and cannot advise you as to what specific data affected your score. The Credit Based Underwriting Score, while numerical, is also different from your FICO Score, which is not obtained by your insurer.

When Your Rate Goes Up

So, you're accident free and haven't had a ticket since high school, yet your rate just went up. What happened? It is essential to note that your premium is made up of the premium for each specific coverage and for each vehicle. Generally speaking, if you are claims free and have not had any moving violations, your liability coverage will remain the same. This is also the coverage that is generally affected by discounts such as defensive driver. When your premium goes up and the change mainly affects your comprehensive and collision coverages, it is most likely due to the claims history of your particular vehicle and location.

For example, if you drive a 2005 Saturn Vue and live in Union City, New Jersey, your comprehensive and collision premium may have gone up due to an increase in the number of claims for 2005 Saturn Vues in and around Union City, New Jersey. It may also have been affected by the cost to repair a 2005 Saturn Vue in your area. Were you to experience a loss, the cost to repair the vehicle would be higher and thus would require a higher payment from the insurance carrier. The most frustrating part of an increase in these coverages is that they might easily affect a first-rate driver with a trim record and there is little that can be done about it.

From time to time, insurance carriers will receive permission from their respective region insurance department to initiate a statewide rate increase. This is done to keep up with the cost of inflation and to meet the demand of rising claims.

Shopping for Insurance

There are many misconceptions surrounding shopping for insurance. For starters, despite what that letter in the mail says, you likely won't save $400 by switching to another company. These figures are clear based on average savings. Consider that astronomical multi-car accounts in expensive metropolitan areas, such as New York City, are going to yield premiums in the thousands, making such savings more realistic.

The conventional wisdom in shopping was that an Independent Insurance Agent was the best way to find the lowest rate. An Independent Agency represents numerous insurance companies rather than objective one. The problem with this near is that relatively few auto insurers allow independent agents to market their products. Those that do also allow consumers to choose directly. If shopping for the lowest rate is your goal, then your best bet is to come multiple direct auto carriers and ask quotes via telephone or internet.

If you teach on forming a personal relationship with an insurance agent, consider doing the direct shopping, but then finding a local agent to service your account once you have placed your business (when possible). For example, if Progressive offers the lowest rate, buy your insurance directly and then find an agent who offers Progressive who can service your story. Making your lift based upon the individual agent may wait on you to form that interpersonal connection, but may cost you money in the long run.