Will an increase in gas prices impact car insurance premiums? During the ABC World News program, Diane Sawyer, and the rest of us watching, were shocked when the price per gallon of gas went up ten cents per gallon during the two minute interview. It immediately occurred to me that we would soon be seeing a reduction in car insurance premiums.
That’s right, when gas prices go up, car insurance premiums generally go down.
Auto insurance prices are based in large part on actuarially determined approximations of what the insurance company expects to pay out in claims. To make these calculations the insurance companies take the total amount of claims generated by a homogeneous (similar) group of insureds and divide by exposure units. In the case of auto insurance those exposure units are normally number of cars, but in a more precise measurement the exposure units become miles driven.
Over the road truckers laconically answer the question, “Where ya headed?” with “I’m driving to my next accident.” They know the more time you spend on the road, the greater your probability of having an accident. Even safe drivers will have accidents that are caused by elements beyond their control, such as inclement weather and other drivers.
When the price of gas goes up, people drive less. Insurance industry figures show that the price of gas has a direct causal relationship with miles driven . . . and contingently on the auto insurance premium you’ll pay.
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