Be a reckless driver and you'll pay for it

The concept of automobile insurance is simple: You pay the insurance company a premium. They invest your money, hope to earn something on it, and if you have an accident, they pay for the damage. Of course, the limits they will pay and the things they will pay for depend upon the specifics of your policy.

But what if your insurance premium was $5,000 to $10,000 a year? Could you afford it? Would you cry foul?

The sad truth is that insurance companies must charge premiums that are high enough to compensate them for the risk they take with you as a driver. If you've got a history of reckless driving, there's a higher chance that you'll cost them money down the road. So they're going to charge you more money in the form of your insurance premium.

It makes sense, doesn't it? Those who cost the insurance company more should pay more. And believe me, insurance companies have huge departments called underwriting that are paid to analyze data and determine how big of a risk you are. Then they tell you exactly how much you'll have to pay.Underwriting bases their decisions on lots of factors. Your driving record is a key one, but they also use things like your age (different age brackets have a higher likelihood of accidents and reckless driving), your zip code (some areas are higher crime or more congested with traffic), and your credit history.

Wait... credit history? Yes. Insurance companies have found a very high correlation between poor credit and the likelihood of an insurance claim. Quite simply, if you're careless with your finances, you're more likely to be careless behind the wheel of the car. Some think this is unfair to those with bad credit. I think it's completely reasonable. So long as they're analyzing the data fairly and not singling you out based upon other factors meant to discriminate against you, what's the problem? Frankly, I think those who are more likely to make claims should pay more in premiums to cover their claims. Why should I have to pay more to cover the irresponsibility of others?

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.
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