If you’re shopping around for insurance right now, you’ve probably heard the term “tiers.” When it comes to car insurance, what are these tiers? How many are there, and what do they mean?
The tier system is a way for auto insurers to provide underwriters with more precise risk assessment information. This data, which is more accurate than what was used in the past, makes it easier to set policy premiums for each driver and household.
It used to be that any time you got into even a minor mishap in your car, your car insurance company would add a fee to your premium. Even getting into a single accident could make your premium rise by a significant amount! In order to keep your premiums as low as possible, you basically had to be a perfect driver with a squeaky clean driving history.
While the factors that are considered when pricing your premiums are about the same as they’ve always been, the tier system means that a single mistake isn’t as likely to bump your premiums sky high. Insurers are still looking at traffic tickets, DUIs, and accidents, as well as what kind of car you have and your zip code in order to set your premium prices. It’s just that the tier system helps keep prices more stable and allow for even higher risk drivers to get decent policies.
How Exactly Does It Work?
Each auto insurance company has its own tier system, and it may vary a bit. Certain carriers may have many tiers, while others have fewer. They can also vary by deductible and liability minimums.
Usually, however, there are three basic tiers of auto insurance. Most companies follow this pattern. The tiers are:
- Sub-standard
- Standard
- Preferred
If your policy is in the “preferred” tier, you have a much lower premium than you would otherwise. You are considered a good driver due to your clear driving history and ample driving experience. Your car is also not considered any particular risk.
Standard drivers don’t have perfect records, and they may have credit issues. However, they are still average or above average compared to drivers as a whole. Their policies are slightly more expensive than preferred tier policies, but they are still affordable.
Sub-standard tier policies are for drivers who have significant issues with their driving record and/or drive high-risk vehicles. They probably have very little driving experience, as well. Usually, however, if you are on a sub-standard tier policy, you can be reclassified to the standard tier if you have no incidents and maintain your insurance policy without a lapse for 3 consecutive years.
Why Does The Tier System Matter To Drivers?
Of course, drivers care about higher premiums. But why should they be happy about the tier system as compared to the methods of years past?
Basically, the tier system is more accurate in assessing risk. Instead of just tacking on fees whenever you have any kind of incident at all, they use complex algorithms to calculate risk. In the past, just a few minor incidents, especially if you were already in a high-risk demographic, could drive your premiums sky high.
Now, however, your insurer will look at a more complete picture to determine which tier you should be in, and if those driving events were out of character for you, you could still end up with a standard tier policy.
In most ways, the tier system has been advantageous for both drivers and the insurance industry, because drivers aren’t charged more unnecessarily, but insurance companies can accurately identify high-risk customers.