In an auto insurance, if you switch your deductible on collision from $500 to $1000, your...

In an auto insurance, if you switch your deductible on collision from $500 to $1000, your premium will be $10~$20 lower. Is this change in premiums reasonable given a reasonable underlying probability of loss? (The average loading on an auto insurance policy is roughly 30%. The average frequency of loss for a 22 year old male (female) driver in Ontario is 5.2% (4.9%).) If the change is not reasonable, what is driving the difference in costs?

Expert Solution

The deduction doubling for collision and thus the premium reduction by $20- $30 is not at all reasonable and should have really been more in the amount of reduction of premium with respect to the 100% doubling of the deduction. With a frequency of loss being 4.9 % to 5.2 % , for a new driver, who has just began the career and is likely to meet more of accidents due to being a novice and thus is the incurred difference of the costs. It is not ruled by the reasonability of the condition of doubling or the nominal premium amount reduction. It is more dependent and directly proportional to the frequency of collisions which is likely to be more for the starters.

keosha answered 2 years ago

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In an auto insurance, if you switch your deductible on collision from $500 to $1000, your...

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