Auto Insurance Basic for the Car Owner
Every car owner should understand the basic elements of the auto insurance policy and what it provides for. The important role that the auto insurance industry plays in society cannot be understated. Companies work with car makers and legislative bodies to come up with laws and standards to make cars safer and protect the public from injury, death and financial loss.
Insurance is a form of risk sharing, meaning the financial liability associated with auto accidents, property damage and personal injury is shared between you the motorist and the company as the provider of an insurance benefit. If you did not have auto insurance in place, any financial risk associated with a car accident would be yours to bear solely.
Risk Pooling
Cheapest Auto Insurance companies base the rates they charge for the insurance they provide to you on several principles. The first principle is that of the assumption that accidents or vehicle damage can be calculated, based on a sampling of the population. Within any sample of say 1,000 individuals, living within a certain population area, an auto insurance company can calculate the rate in which an accident can and will occur. This predictability is important because it is through this sampling that an auto insurance company determines how much you pay for your insurance.
You are viewed as a member of a pool of potential risk. This pooling is based on certain factors such as your age, your driving habits and your zip code. You are both unique and homogeneous within your pool of similar units, which is good because the experience of the pool is what keeps your costs low.
Law of Large Numbers
The law of large numbers is a principle that guides every type of insurance sold in the United States and throughout the world. This principle simply put means that insurance is written on the basis of the experienced of many people, not just 1. In order for an insurance company to discern patterns and trends of a loss, say auto theft, it has to be viewed from the standpoint of a large number of individuals and not just 1 in order to be calculated and rated. If the risk were that of just 1 person, it would not constitute an insurance risk for the company because the odds of loss occurring is too great.
The Nature of Risk
Risk is always present. Every time you step into your automobile, buckle up and start the ignition, there is a chance that something could happen. You pull away from the driveway and a pedestrian can jump into your blind spot. You go past a stop sign and an unaware motorist hits you on the passenger side. The probability of these things happening to you is the risks we face and are calculated by the auto insurance company with precision and accuracy.
Auto insurance companies understand that risk cannot be eliminated but the steps that you take to reduce or lower the risk of loss occurring translates in savings for you. Buckling your seat belt, driving on safe routes, choosing not to drive when feeling tired or agitated are all ways to reduce your risk of being in an accident and can also mean lower auto insurance rates for you.
These basic principles of auto insurance are the same for all type of insurance that you own or buy. They are important to understand because they guide the auto insurance company's decision making process and help you obtain the coverage you need at an affordable price.