Another thing I'm learning, as I research this article, is that old people are extraordinarily bad drivers; per mile travelled, a driver over 75 is more dangerous than a driver 15-24. By 2030, it's thought that seniors will be responsible for 25% of all auto accidents.
So one has to wonder, how come the AARP has its own discount insurance plan? It's as if The Hartford, which offers it, had found a vast pool of bad drivers, and decided to offer them a bonus for signing on. The program offers no insurance penalty for the first accident, which must be welcome news to seniors, since apparently they generally don't decide to get off the road until they've had at least a couple of fender-benders.
I presume it must be a combination of volume, and desireable demographics. Anyone have any ideas?
What's the ratio of average premium dollars paid to miles traveled for oldsters vs. the mean?
Are you sure the discount is from a blended general-driver rate, as opposed to from a rate structure offered to non-AARP members which does take age into account?
Also, while I'm just guessing, age may sometimes operate as a proxy for driving fewer miles. Auto insurers profit if they can identify and serve customers who put only 4,000 miles a year on their cars, even if they are twice as dangerous per mile as those putting 10,000 a year. Asking people to self-report low expected mileage doesn't work well, especially once they realize the purpose of the question.
Basically what Walter_Olson said. Insurers don't care how dangerous you are per mile driven; they care how dangerous you are per unit *time* (i.e. per 6-month period or whatever over which you buy the policy).
Duh?
Maybe older drivers' accidents are less costly events. Fender benders and the occasional low-speed crash through the front window of a post office probably result mostly in some low-dollar property damage.
That contrasts with the younger drivers crashing spectacularly on the freeway near my house. Those accidents frequently result in death or serious injuries. Many older drivers won't even drive on the freeway.
If the people signing up with the AARP plan are worse than average drivers, and the Hartford is giving them below average rates, the Hartford will lose money and will stop offering the policy, unless AARP is offering them some financial inducement to subsidize AARP members. Isn't that how markets are supposed to work?
As for "volume," why it would it be a good idea to insure a lot of high-risk drivers instead of just a few? And "desirable demographics" implies that old folks are low-risk drivers, when you just said they were high-risk.
Confused in DC.
A toddler driving your car is probably more likely to crash than a 40 year old female, however, a toddler is less likely to be driving your car, given the ready supply of breast milk, crusty toast and Gerber inside of mommy (where all babies think everything derives). It's the same way with old folks (aka seniors). They may drive worse, but they also may drive a lot less.
In addition to that, household factors make a difference. Invariably your insurance company is going to price your policy and add all drivers in a household to the policy who are licensed (unless proof of other insurance is provided). Thus, the average person is usually hiding a kid or two, cousin Cooter, some near stranger who dropped in, and Aunt Bronte up in the attic. That rarely happens in the homes of seniors.
My friend in insurance (let's call him Biff, and unlike Megan, my friends are really not me) gets calls all the time from parents who want a "quote" on adding Johnny Junior and his Ford F150, not realizing that the minute the company knows that Johnny lives at home and is licensed, he will be on that policy, regardless. And adding Johnny will raise that six month premium by $300 to $1700, cause we (meaning my friend and the actuarial department) know what Johnnies do.
Then there is the credit/financial factor. In most cases the average senior is likely to have a better credit background and one will rarely have situations where they are calling to be "reinstated" after missing payments, while simultaneously also wanting to file a claim.
Periodically the senior might call you and say, "Hey, you guys haven't sent me a bill in 8 months, and I got this check in the mail from you," and invariably the answer is, "Mr.Florida, you mailed us a check a month ago, but you are on recurring payments via your account at Northern Trust, so that is an overpayment refund".
Location is also a factor. The insurance company might get a call from Tony, who lives in Connecticut, but actually drives his car all over the Bronx (secretly using it to make deliveries of power tools), or a call from Tina in that wonderfully ugly city of Trenton, and they will be priced accordingly. However, many seniors might be calling from a retirement village in an appropriately comfy zip code and zip codes matter when pricing out insurance.
Then too, many seniors live near other seniors, which also means that if they do have a crash, the liability could just as easily go the other way, and if it does, the other party is likely to be well covered.
So it's not merely the fact of accident frequency. It can be credit, where you live, type of car, household factors, types of coverage, and a bunch of other components that can lead a company to conclude it's worthwhile to insure a group of people.
(Also, my non-hypothetical customer service friend says to stop asking insurance agents to 1) "lower my rate": Generally they don't have that power and 2) Stop asking "Why...?": Unless you understand algorithms and have ten hours, you won't get an explanantion, and even if you had the ten hours, the actuarial department is not going to take your call and explain to you what percentage of the price of your policy is due to the vehicle's symbol factor, or your credit, or your location).
"per mile travelled, a driver over 75"
Not that I'm an expert on auto insurance pricing, but:
1. "... little old lady, who only drove the car to church on Sundays ..." - old people generally don't drive often or far.
2. AARP is open to anyone who has turned 50. Assuming the same insurance is offered to all AARP members, the insurance company is getting a lot of 50-74 year olds.
I don't have any idea. Maybe you should consult a real economist.
Mmmm...
All of the above plus:
Hartford sees an opportunity for cross selling
and
Maybe seniors leave a trail of carnage in their wake by causing accidents they're not involved in by 1) merging onto the freeway at 30, followed by 2) moving into the middle lane at 35, concluding with 3) moving onto the exit ramp at the last second (witnessed this morning on my way to work).
By 2030 75 will be the new 25.
As a corporate citizen of AIG's vast empire (screw the hartford!) I can certainy confirm that old people and AARP mailing lists are quite the valuable resource for a company selling financial services. Lose a penny on fender benders, make a pound on retirement services and financial planning--the 50-74 crowd is high net worth.
Also, as a property (not auto thank god) underwriter, not only did you blatantly blow your rating units, but you're confusing frequency and severity. Old folks are a pretty lousy risk even per year, but their average accident is less significant. Throw in high premiums because they're more risk averse than average (and that really costs you in a high frequency rating class--who says a deductible buydown is part of the special) and there you go
I agree that much of the explanation may lie in Megan's daft adoption of "per mile travelled" Mind you, the same daft convention is used in deciding who drives "gas guzzlers".
That contrasts with the younger drivers crashing spectacularly on the freeway near my house. Those accidents frequently result in death or serious injuries. Many older drivers won't even drive on the freeway.
On a related note, many older people avoid driving after dark, which is when the most severe crashes are likely to occur. Of course there's a bit of a chicken-and-egg question here.
Others have already covered this: seniors drive fewer miles.
Let's see. 14.5% of all drviers out there have no insurance. Most of those live in cities where premiums are highest.
I wager a bet. Not too many of those old drivers live in cities or have no insurance.
Who exactly do you think is paying for all those uninsured drivers out there?
At least we now know that the elderly aren't subsidizing the uninsured.
This raises an interesting question, though: why isn't collision insurance sold by the mile? Cars have odometers, after all.
It's much easier to administer per unit time, per vehicle than having to go check the odometer.
BTW, if you go to the Actuarial Outpost's Property & Casualty subforum, you may just find out from the actuaries there what their major rating factors are. Yes, it's mainly actuaries who hang out there (I'm a life actuary), but they're pretty tolerant of non-actuaries asking insurance questions.
Or you could look at this article on age rating auto insurance.
Previous commenters have nailed this on the merits. I'd just add that when you see a business doing something that looks to you like a dead-sure money loser, the best response is usually to wonder whether you've overlooked something.
Don-K and Jack have it right, I suspect...the car insurance is a loss leader (mitigated by the other factors noted by posters) for the sale of other financial services to relatively wealthy people with significant financial decisions to make. I suspect at some point the AARP will ink a free-auto-insurance deal with someone!
My guess is that they know what they are talking about and are doing it because it is highly profitable.
A simple explanation is that AARP is acting as a salesman, but passing the commission along to its members. Commissions and other discretionary costs are at least half the normal price of insurance at some insurance companies (most, I would guess). Nor would I be surprised if it would be even cheaper to go with Geico.
In addition to the other factors I would expect old people tend to be sympathetic defendents if a case goes to court.