How Does Car Insurance Underwriting Work?
When you apply for a car insurance policy, you’ll typically have to provide lots of information. This includes facts about where you live, your driving record, and the type of vehicle you drive, along with things like your age, credit score, and gender. These factors are used to determine how much money you’ll pay for car insurance.
But how do car insurance companies actually calculate your price? Enter underwriters. Here’s everything you need to know about how underwriting reviews in car insurance work.
What is an insurance underwriter?
Think of an underwriter as a bouncer at a club. They enforce the rules, keep dangerous people out, and try to make sure everyone’s having a good time.
Underwriters use a lot of factors to determine how “risky” you are to insure. They’ll first decide if the insurance company should cover you or not. If the company decides to cover you, the underwriter will calculate how much to charge you as a premium. The riskier you are, the more you’ll pay for insurance. Underwriters help balance the overall risk (and premiums) for the individuals they cover.
Underwriters will often review your policy when you go to renew it at the end of the term, typically each year. Depending on any changes to your situation (like an increased number of claims), the underwriter may increase your rates or cancel your policy altogether.
The difference between an insurance underwriter and an agent
The car insurance industry has two important roles: insurance underwriters and sales agents. Both are needed to help people and businesses get insurance. However, they have different jobs and responsibilities in the industry.
Insurance underwriters are responsible for evaluating the risks associated with insuring an individual or entity, and determining the terms and pricing of an insurance policy accordingly. They assess different factors, such as the applicant's profile and potential exposure to hazards, to make informed decisions about coverage eligibility and policy terms.
On the other hand, insurance agents serve as intermediaries (the “middlemen”) between insurance companies and policyholders. They serve customers in identifying their insurance needs, providing advice on suitable coverage options, and facilitating the purchase of policies. Agents are often the first point of contact for clients seeking insurance coverage and provide valuable guidance throughout the process.
Overall, while underwriters and agents both contribute to the goal of providing insurance coverage, they do so through distinct roles. Underwriters analyze and price you based on your risk, and agents help you navigate the complexities of your policy options.
Why is underwriting important for car insurance?
It's important for underwriters to get their calculations right. Car insurers want to know how likely you are to file a claim and cost them money, to guarantee their losses aren’t more than the amount they bring in via premium payments. After all, insurance companies are businesses and want to make a profit.
LOOP does underwriting reviews for car insurance differently. We focus less on driving a profit and more on offering fair, consistent rates to drivers based on where and how they drive. Using telematics, we work to identify and target high-risk drivers, which means we don’t need to increase rates for all drivers over time.
Jonathan Seibold, Head of Insurance at LOOP explains:
“There are too many people in this world who have had a tough break. And they shouldn't be profiled and penalized over that. Because if you have to pay extra for insurance, that means you have less money to put on the table for your family, or to keep a roof over your family, or to get a car. People deserve some hope and some opportunity”.
How certain factors affect your ability to get a good rate on car insurance
Understanding how much your car insurance premiums are going to cost you can often be a bit of a mystery. There are a lot of different factors that can contribute to the overall cost. Underwriters must often make assumptions about the type of driver you are, how likely you are to file a claim, and how much money you may cost the company while having a policy.
Underwriters will often take certain factors—like your credit score or job title—to assume certain things about you and the type of driver you are.
For example, if you have a high credit score and own a home, an underwriter may assume you have more money and are more responsible. You're seen as a customer who’s more likely to pay for repairs out of pocket first, instead of filing a claim. Big car insurance companies may also give drivers with higher credit scores a discount to get them to purchase other insurance products.
Those of us with lower credit scores are often assumed to be riskier, and are charged more for insurance. Studies show that your credit score can raise your insurance premiums by 50–70% in some cases, depending on the insurance carrier and the state. At LOOP, we believe a three-digit number shouldn’t determine your financial future, at least where car insurance is concerned.
“You are more than that credit score, you are an individual and your telematics is much more valuable than an arbitrary number that's assigned by a financial institution”, says Seibold.
How LOOP uses insurance underwriting to create fair pricing
So how does LOOP price? We focus only on what's important: how and where you drive. Instead of relying on outdated factors like job title and credit score to underwrite your policy, we use a dynamic measure of risk, a combination of telematics and artificial intelligence, to create more inclusive pricing for our customers.
What we use
We use data on where you drive, including the roads you drive on, the streets you park on, and the way you drive. We also factor in how many years you’ve been driving and the type of vehicle you drive.
To understand how you drive, we use predictive models and real-time driving data like:
- How fast you drive
- How hard you break and turn
- If you’re driving distracted
- How much time you’re spending on the road
What We Don’t Use
Here are some things we’ll never use to determine your car insurance rates:
- Your credit score
- Your job title
- Your zip code
- If you own a home
- Your educational background
We believe using factors like credit scores leads to discrimination, creating barriers for marginalized communities to access fair and affordable car insurance rates. We believe in mobility for all—no matter your neighborhood’s home prices, what your job is, or how far you got in school. Because none of that has anything to do with how you drive.
“If you are someone who's driving safely, then my goal is to give you a good rate, and not charge you extra because you've had a couple of credit cards go into collections”, says Seibold. “I don't want you to be treated as just a number, I want you to be treated as an individual, and as the person that you are”.
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