What Is a Private-Passenger Auto Insurance Policyholder Risk Profile?

A private-passenger auto insurance policyholder risk profile is an estimate of the risk an insurance company will take on by covering a specific automobile operator with an insurance policy. The private-passenger auto insurance policyholder risk profile allows an insurance company to estimate the likelihood that a particular driver will get into an accident, causing a claim to be made against a policy. Insurance companies sort policyholders into groups based on their risk profiles.

Key Takeaways

  • A private-passenger auto insurance policyholder risk profile quantifies the amount of risk an insurance company will take on by offering insurance to a policyholder.
  • There are three kinds of profiles, in order of least risk to most risk: preferred, standard, and nonstandard.
  • Insurance companies will generally have policyholders of all three profiles, balancing low-risk policyholders and the low revenues they generates with high-risk ones and the high revenues they produce.

Understanding a Private-Passenger Auto Insurance Policyholder Risk Profile

At its heart insurance is about accounting for risk, a process known as underwriting. The private-passenger auto insurance policyholder risk profile is designed to facilitate underwriting by quantifying that risk. The more likely a claim is to be made, the higher the premium an insurance company is going to charge. Automobile drivers who have a history of accidents, live in areas where claims are more likely to be made, or have other attributes associated with higher accident rates, will have to pay a higher premium in order to obtain coverage.

The private-passenger auto insurance policyholder risk profile is typically broken into three segments: preferred, standard, and nonstandard. Preferred policyholders are the least risky and most desirable because they are least likely to have a claim filed against them. Standard drivers are considered average, in that they don’t have a spotless driving record but don’t have many blemishes. On the opposite end of the spectrum is the nonstandard profile, which is attributed to the riskiest drivers. Because they are the most likely to be involved in an accident, risky drivers have to pay the highest premiums and in some cases may not even be able to obtain insurance.

Insurance companies are likely to have policyholders in each of the three risk profiles. They want to balance the low premiums (and thus low revenue) associated with the preferred profile drivers with the greater premiums associated with more risky drivers. The goal is to limit the risk across a portfolio of policies relative to the amount of premiums that all the policies bring in.

Drivers should do their utmost to improve their risk profile or maintain a low-risk one.

Special Considerations

Drivers have a great deal of motivation to try to improve or safeguard their risk profile. Here are two strategies for doing it.

  1. Build the best possible driving record. The first step to a better risk profile is to avoid reckless driving practices, violations, and major damages. Aside from that, drivers can take classes to improve their driving skills or, specifically, defensive driving skills. This will help show your insurer that you are committed to safe driving.
  2. Avoid filing claims, if possible. Filed claims build up a claims history, and most companies would not want to have policyholders who file claims often. I you must file a claim, make sure it is for bigger damages and losses. (Note: This could mean that it makes sense to opt for a higher deductible on your policy, which should reduce its cost.)