Preferred Auto Coverage

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Updated May 26, 2022

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What Is Preferred Auto Coverage?

Preferred auto insurance is offered to drivers considered to fall into the lowest risk profile. This takes into account the driver’s characteristics, and is offered to drivers considered the least likely to file a benefits claim. These drivers pay the lowest premiums for coverage, lower than those for drivers with an accident or mishap in their record.

Being able to estimate the risk in underwriting a new policy can make or break an insurance company. If the company prices the policy correctly and understands the claim risk it can be profitable, since the premiums it brings in will exceed the benefits it pays out. Most insurance companies want a mix of low premium drivers who carry reduced risk, and higher premium drivers who are considered more likely to get into an accident. If the insurer does not effectively understand the risk associated with underwriting a policy it can wind up taking on too much risk and paying out more benefits than it receives in the premiums.

Key Takeaways

Preferred auto coverage is low premium insurance offered to drivers, who have a clean record and are relatively less risky as compared to other applicants.
Insurance companies consider a number of factors, such as age and driving record, and compare them to available actuarial information before deciding to offer preferred auto coverage to preferred drivers.
Generally, insurance companies prefer a mix of low premium and reduced risk drivers and high premium drivers in their insurance pool.

Understanding Preferred Auto Coverage

Insurance companies pay close attention to individuals and businesses when determining whether to underwrite a new policy. In the case of auto insurance, the insurer will consider the driver’s age, driving record, car usage, credit history, and location, and will compare the driver’s characteristics with actuarial information. This information helps the company determine the likelihood of the driver getting into an accident, and is in turn used to set the premium that the insurer will charge for coverage.

Preferred Risks

Insurers typically divide drivers into three categories: preferred, standard, and substandard. Preferred drivers are considered the least risky based on their driving history and vehicle usage characteristics, and are offered lower premiums. Standard drivers are considered “average” in terms of risk, and pay a regular premium. Substandard drivers are considered the riskiest to insure, and they either pay the highest premiums or are denied insurance coverage and must go to a state assigned risk pool for coverage.

Preferred drivers are likely to have an excellent driving record, have substantial driving experience, have a good credit history, use the vehicle for commuting relatively short distances, and do not own a sports car. They may also live in areas where there is a lower incidence of car theft and vandalism. They don't miss making policy payments and don't get tickets or get into accidents, whether it's your fault or not. Many people are surprised to learn that insurance companies in some states can raise your premiums or refuse to insure you if you get into accidents that aren't your fault.