This is a question many are curious about (or perplexed about): how do insurance companies like Erie Mutual Insurance decide what to charge their policyholders for auto insurance?
The short answer is that auto insurance rates in Ontario are set by governing bodies using a regulated, data-driven process that combines provincial rules + actuarial science (stats and math), + the insurer’s own claims experience.
For mutual insurance companies in Ontario like Erie Mutual, auto insurance rates are collectively set by the OMIA (Ontario Mutual Insurance Association) so that the same auto rates are provided to all Ontario Mutuals to use when determining/calculating an automobile owner’s premium.
Note: This is only the case for auto insurance; each separate mutual sets their own rates for all other lines of insurance, including home, tenant, condo, farm, and commercial.
Now in more detail…
1\ PROVINCIAL REGULATION SETS THE FRAMEWORK
Insurance in Canada is regulated at the provincial level, and insurers like Erie Mutual must file their rating models with each province’s insurance regulator.
Here in Ontario, auto insurance rates must be approved by the Financial Services Regulatory Authority of Ontario (FSRA).
This means that we, and other insurance companies, cannot arbitrarily set auto insurance rates; we all must follow approved methods and justify every change.
2\ DATA CALCULATES EXPECTED AUTO INSURANCE CLAIM COSTS
Professionals who use mathematical and statistical models to assess and manage risk (“actuaries”) evaluate the numbers and calculate the base cost of auto insurance, known as pure premium.
These numbers take into account:
- The expected frequency of claims (how often accidents happen)
- The expected severity of claims (how expensive accidents are)
- Inflation (especially repair, medical, and legal costs)
- Trends in fraud or litigation
- Weather-related patterns (hail, storms, deer collisions)
3\ THE INSURER’S OWN LOSS EXPERIENCE MATTERS
If members of a particular mutual insurance company tend to have more severe claims or higher costs than industry averages, rates may rise; if they perform better, rates can remain lower.
Mutual insurers like Erie Mutual rely heavily on things like:
- Their historical claims data
- Risk patterns are unique to their region or customer base
4\ RATING VARIABLES CAN ADJUST INDIVIDUAL PREMIUMS
More or less everything covered above so far is objective, and out of your hands; however, other factors can determine what you pay for auto insurance that directly relate to you.
Once the base premium is calculated using the metrics above, it’s then adjusted using rating factors that predict risk.
Common factors include:
- Driver-Related Factors
- Driving record (accidents, tickets)
- Years licensed
- Age and experience
- Driver training
- Vehicle-Related Factors
- Make, model, year (e.g. some vehicles are stolen more often or cost more to repair)
- Vehicle safety features
- Repair costs and parts availability
- Location factors such as collision frequency, theft rate and weather patterns in the area where you live
- Usage factors like annual kilometres driven, commuting vs. pleasure use, and business use.
- Policy-related factors, including deductible selection, optional coverages (e.g. comprehensive, collision, loss-of-use, liability limit) and discounts (e.g. multi-policy, loyalty, claims-free, winter tires)
Each factor is weighted based on actuarial analysis and must be approved by regulators.
5\ OPERATIONAL AND ADMINISTRATIVE EXPENSES COME INTO PLAY
Insurers may then add costs related to things like:
- Administration
- Claims handling
- Broker commissions
- Reinsurance
These expenses are layered on top of the pure premium.
6\ PROFIT MARGIN (OR SURPLUS CONTRIBUTION FOR MUTUALS)
For stock insurance companies, a profit margin is added.
For mutual insurers like Erie Mutual, there is no shareholder profit; instead, funds contribute to surplus/reserve for future claims.
Some mutuals return surplus to members in profitable years (varies by insurer).
FILING AND REGULATORY APPROVAL
Once all 6 layers outlined above are factored in to come up with the auto insurance premium a customer or member is asked to pay, the insurer then submits the following to the FSRA for review:
- Justification for the rating structure
- Actuarial support
- Impact analyses on consumers
The regulator reviews it and either:
- Approves the rates
- Asks for revisions
- Rejects the filing
Only rates approved by the FSRA can be used.
We hope this helps add context to the question about how insurance companies determine the rate of auto insurance.
If you have any questions about your rates or policy, please do not hesitate to reach out anytime, and we’ll be happy to help.
Erie Mutual Insurance proudly serves the commercial insurance, farm insurance, home insurance and auto insurance needs of members throughout Southern Ontario including Haldimand, Niagara and Hamilton.
Please don’t hesitate to contact us with any questions you may have about this or any other topic related to your insurance.
