Why do males under 25 pay more for car insurance?

THE ISSUE

Although some insurance companies have started to base their rates on the number of years of driving experience rather than age, on average, it still costs young men more to insure their cars than young women or other age groups. A family that adds a teenage daughter to its insurance policy will pay about twice as much as before. If the same family adds a teenage son to the policy, the premiums may triple. Why do young men have to pay more for car insurance?

THE FACTS

To insurers, you’re not a person—you’re a set of risks. Before quoting a price for insuring your car, they consider the type of car, number of miles you drive per year, where you live, and who you are: age, gender, marital status, and driving record. Why? By comparing your profile to profiles of typical people who have been involved in crashes, they can estimate the likelihood of you having an accident that will cost them money.

While less than 7 percent of drivers are under 25, they are involved in 25 percent of traffic accidents. For drivers age 16 to 19, the crash risk is four times higher than for older drivers. Men of all ages are involved in twice as many crashes as women, and fatal crashes are twice as common among teenage males as teenage females. Check the chart below for more facts about young drivers.

Some companies also consider educational level and occupation. People with advanced degrees have fewer accidents than those with high-school diplomas.

Who are the best drivers? They include editors, judges, firefighters, health technicians, homemakers, teachers, secretaries, and artists. The riskiest? Students, doctors, attorneys, architects, and real-estate agents.

THE ECONOMIC CONNECTION: PROFIT INCENTIVE

Like all businesses, insurance companies have a profit motive: they must make a profit to stay in business. When a clothing company sells you a pair of jeans, it’s not taking a financial risk. But when an insurance company sells its service, it’s taking a big risk. If you have an accident, the medical care, court costs, car repairs, and other expenses you might have will more than wipe out any profit the company might have made from the premiums you pay.

Successful companies do research to find out which types of customers generate the most—and the least—profit. Based on their research, auto insurers know it’s less risky— and more profitable—to insure a 40-year-old woman teacher who owns a station wagon and has been driving and paying premiums for 20 years without having an accident.

On the other hand, a 16-year-old male student with six months’ experience driving a sports car carries a much larger risk.

Traffic accidents involving teens cost society about $40 billion a year. Insurance companies must offset the losses they sustain on accident claims in order to make a profit. Since a few young men cause most of these accidents, all young men pay higher insurance premiums. But they are not the only ones. Companies usually also distribute some of the higher costs among all of their customers.

CONCLUSION

The profit incentive that drives all businesses in a market economy determines the prices consumers pay for goods and services. To ensure that profits (premiums) are greater than losses (accident claims), insurance companies charge all customers more, so all buyers of car, mortgage, or health insurance pay for the mistakes of others. When some young men drive recklessly, some homeowners cause fires by leaving lit candles unattended, or medical patients continue to live unhealthy lifestyles—everyone pays more for insurance.