Auto insurance risk selection is the process by which vehicle insurers determine whether or not to insure an individual and what insurance premium to charge. Depending on the jurisdiction, the insurance premium can be either mandated by the government or determined by the insurance company in accordance to a framework of regulations set by the government. Often, the insurer will have more freedom to set the price on physical damage coverages than on mandatory liability coverages.
When the premium is not mandated by the government, it is usually derived from the calculations of an actuary based on statistical data. The premium can vary depending on many factors that are believed to have an impact on the expected cost of future claims. Those factors can include the car characteristics, the coverage selected (deductible, limit, covered perils), the profile of the driver (age, gender, driving history) and the usage of the car (commute to work or not, predicted annual distance driven).
2 Usage Based Insurance
3 Patented risk selection systems
Conventional methods  for determining costs of motor vehicle insurance involve gathering relevant historical data from a personal interview with, or a written application completed by, the applicant for the insurance and by referencing the applicant's public motor vehicle driving record that is maintained by a governmental agency, such as a Bureau of Motor Vehicles. Such data results in a classification of the applicant to a broad actuarial class for which insurance rates are assigned based upon the empirical experience of the insurer. Many factors are deemed relevant to such classification in a particular actuarial class or risk level, such as age, sex, marital status, location of residence and driving record.
The current system of insurance creates groupings of vehicles and drivers (actuarial classes) based on the following types of classifications.
Vehicle: Age; manufacturer, model; and value.
Driver: Age; sex; marital status; driving record (based on government reports), violations (citations); at fault accidents; and place of residence.
Coverage: Types of losses covered, liability, uninsured or underinsured motorist, comprehensive, and collision; liability limits; and deductibles.
The classifications, such as age, are further broken into actuarial classes, such as 21 to 24 year olds, to develop a unique vehicle insurance cost based on the specific combination of attributes for a particular risk. For example, the following information would produce a unique vehicle insurance cost:
Vehicle: Age - 7 years old; manufacturer, model - Ford, Explorer XLT; value $ 18,000
Driver: Age - 38 years old; gender - male; marital status - single; driving record (based on government reports) violations - 1 point (speeding); at fault accidents - 3 points (one at fault accident); place of residence 33619 (zip code)
Coverage: Types of losses covered; liability - yes; uninsured or underinsured - no; motorist comprehensive - yes; collision - yes; liability limits - $100,000/$300,000/$50,000; deductibles - $500/$500.
A change to any of this information might result in a different premium being charged if the change resulted in a different actuarial class or risk level for that variable. For instance, a change in the drivers' age from 38 to 39 may not result in a different actuarial class because 38 and 39 year old people may be in the same actuarial class. However, a change in driver age from 38 to 45 may result in a different premium because the records of the insurer indicate a difference in risk associated with those ages and, therefore, the age difference results in a change in actuarial class or assigned risk level.
Current insurance rating systems also provide discounts and surcharges for some types of use of the vehicle, equipment on the vehicle and type of driver. Common surcharges and discounts include:
Surcharges: Business use.
Discounts: Safety equipment on the vehicle airbags, and antilock brakes; theft control devices passive systems (e.g. The Club), and alarm system; and driver type - good student, and safe driver (accident free); group - senior drivers fleet drivers .
Usage Based Insurance
Main article: Usage based insurance
Telematics Insurance System from AIOI patent application WO 2005083605
Conventional rating systems are primarily based on past realized losses and the past record of other drivers with similar characteristics. More recently, electronic systems have been introduced whereby the actual driving performance of a given driver is monitored and communicated directly to the insurance company. The insurance company then assigns the driver to a risk class based on the monitored driving behavior. An individual, therefore, can be put into different risk classes from month to month depending upon how they drive. For example, a driver who drives long distance at high speed in one month might be placed into a high risk class for that month and pay a large premium. If the same driver drives for short distances at low speed the next month, however, then he or she might be placed into a lower risk class and charged a lower premium.
Norwich Union offered a type of telematic auto insurance in the United Kingdom,discontinued in 2008, called Pay as You Drive. This system employed a combination global positioning system (GPS) and cell phone in a car to monitor driving performance and communicate risk factors to the insurance company. Drivers were offered a discount if they exhibited safe driving as Norwich defined it. Trials conducted by Norwich Union in 2005 found that young drivers (18 to 23 year olds) signing up for telematic auto insurance had a 20% lower accident rate than average.
In the United States, Progressive Corporation has an auto insurance program called MyRate. The program gives drivers a customized insurance rate based on how, how much, and when their car is driven. MyRate is currently available in Alabama, Kentucky, Louisiana, Michigan, Minnesota, Maryland, New Jersey and Oregon. Driving data is transmitted to the company using an on-board device. The device connects to a car's OnBoard Diagnostic (OBD-II) port (all automobiles built after 1996 have an OBD-II.) and transmits speed, time of day and number of miles the car is driven. There is no GPS in the MyRate device, so no location information is collected. Cars that are driven less often, in less risky ways and at less risky times of day can receive large discounts. Progressive has received patents on its methods and systems of implementing usage-based insurance and has licensed these methods and systems to other companies. Progressive has service marks pending on the terms Pay As You Drive and Pay How You Drive.
Other insurance companies are offering telematic auto insurance products in Germany, South Africa, and Japan.
Patented risk selection systems
New risk selection methods may be patentable to a greater or lesser degree depending upon the patent laws of various countries. These patents are generally described as business method patents. The United States is fairly liberal in granting business method patents. Europe is fairly conservative.
Different forms of telematic auto insurance, for example, were independently invented and patented  by a major U.S. auto insurance company, Progressive Auto Insurance us 5797134
and a Spanish independent inventor, Salvador Minguijon Perez EU 700009
. The Progressive patents cover the use of a cell phone and GPS to track movements of a car. The Perez patent covers monitoring the car's engine control computer to determine distance driven, speed, time of day, braking force, etc. Ironically, Progressive is developing the Perez technology in the US and Norwich Union is developing the Progressive technology for Europe under a license from Progressive. Progressive does not have to get a license to the Perez patent since it was never filed in the US.
^ McClenahan, Charles. "Ratemaking"
(PDF). Casualty Actuarial Society. Archived
from the original on 14 May 2006. Retrieved 2006-05-11.
^ "What determines the price of my policy?"
. Insurance Information Institute. Retrieved 2006-05-11.
^ "How Are Auto Insurance Rates Calculated?"
. Countrywide Insurance Services. Archived from the original
on 2006-02-08. Retrieved 2006-05-11.
^ US application 20,040,153,362
Bauer, Alan Rex; Burns, Kurtis Tavis; Esposito, Michael Vincent; Huber, David Charles JR.; O'Malley, Patrick Lawrence; "Monitoring system for determining and communicating a cost of insurance", January 2004
^ UK: Norwich Union launches innovative "Pay As You Drive" insurance with prices from 1p per mile, Norwich Union press release, 05 October 2006
^ Nowotarski, Mark, "Progressive Builds a Fortress of Patent Protection", Insurance IP Bulletin, October 15, 2004