Nonstandard Auto Insurance

Nonstandard auto insurance is offered to drivers considered to carry the most risk. Nonstandard auto insurance for a driver takes into account the driver’s characteristics, and is offered to drivers considered the most likely to file a benefits claim. These drivers pay the highest premiums for coverage.

Insurers typically divide auto insurance into three categories: preferred, standard, and nonstandard auto insurance. 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. They want a mix of low premium drivers who carry low risk, and drivers paying a higher premium who are 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 the premiums it receives.

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 drivers are considered the least risky based on their driving history and vehicle usage characteristics, and are offered the lower premiums. Standard drivers are considered “average” in terms of risk, and pay a regular premium. Substandard drivers are considered the most risky to insure, and thus either pay the highest premiums or are denied insurance coverage.

Nonstandard drivers are likely to have been in multiple accidents or received speeding tickets in the past, and may not have substantial driving experience. Insurers offering nonstandard auto insurance may forgo checking the driver’s credit history, meaning that the driver could have poor or no credit. Policies may not be offered to drivers who are too young or too old, since drivers in that part of the age spectrum carry too much risk.

The exact size of the nonstandard auto market is hard to pin down. Industry estimates calculate the market at 30 to 40 percent of the total private passenger auto insurance industry. According to Conning Research & Consulting’s “Personal Lines Consumer Markets Annual” report published in late 2014, the market could bring in $33 to $40 billion in annual premiums.