Nonstandard Auto Insurance

What Is Nonstandard Auto Insurance?

Nonstandard auto insurance is offered to drivers considered to carry the most risk of an automobile accident. Auto insurance is a policy purchased by the owner of a vehicle — from an insurance company — to help cover the cost of an automobile accident.

Nonstandard auto insurance is for vehicle owners who have a poor driving record or a history of accidents. Nonstandard auto insurance is typically more costly to the vehicle owner than a traditional policy since the insurance company has a greater risk that they may need to payout funds due to an accident.

Understanding Nonstandard Auto Insurance

Typically, an insurance company offers an auto policy to a vehicle owner and agrees to pay for damages due to an accident. However, there are often limitations regarding how much the insurance company will payout and the level of coverage. In return, the vehicle owner pays a monthly premium or fee to the insurance company for the coverage on the vehicle.

Those who have been in auto accidents in the past or have a less-than-perfect driving record will typically have higher premiums for their policies since there's a higher risk to the insurance company of an accident and an insurance claim being filed.

Reasons for Nonstandard Auto Insurance

Drivers can fall into the nonstandard insurance category for various reasons, including:

Nonstandard drivers are likely to have been in multiple accidents, or received speeding tickets in the past, or may not have substantial driving experience. Insurers offering nonstandard auto insurance may forgo checking the driver’s credit history, meaning that the driver could have poor or no credit. Policies may not be offered to drivers who are too young or too old since drivers in that part of the age spectrum carry too much risk.

Deductible for Nonstandard Auto Insurance

A deductible is an amount of money that the insured must pay out-of-pocket before the insurance company covers a claim under the policy. A deductible can be a small or large amount, depending on the type of policy and the risk to the insurance company that the policyholder represents.

Typically, a high-risk policyholder will have a higher deductible than a low-risk policyholder. Also, the size of the deductible can influence the monthly premium amount. For example, if a policyholder opts for a high-deductible, their monthly premium may be lower. The reason for the inverse relationship between premiums and deductibles is that insurance companies have a lower risk of paying for a claim for policies with a higher deductible since the vehicle owner is on the hook for a larger amount of the costs associated with an accident.

Conversely, a low deductible may translate to a higher premium for a high-risk policyholder. However, it's important to remember that if a person is in an auto accident and has a high deductible-low premium policy, the cost of the accident might exceed any savings from having low monthly premiums. In other words, the high out-of-pocket cost from the deductible might be so costly; it negates any of the savings from the low monthly premiums.

How Insurance Premiums Are Determined

Insurance companies must estimate the claim risk in underwriting a new policy since the premiums it brings in will exceed the benefits it pays out in order to be profitable. Claim risk is the likelihood or probability that the insurance company may need to pay out a claim to the policyholder or vehicle owner in the event of an accident.

Typically, insurance companies must determine the proper balance of low claim risk drivers — that pay lower premiums — with moderately-to-high risk drivers — that pay higher premiums. If the insurer does not effectively manage their claim risk, they can wind up taking on too much risk and paying out more benefits than the premiums it receives.

When determining a premium, an insurer usually considers the following factors:

Although not a comprehensive list of all of the factors considered, the information listed above helps insurers determine the driver's likelihood of getting into an accident. From there, a monthly premium amount to charge for the coverage can be calculated.

Nonstandard vs. Standard Auto Insurance

Standard auto insurance is a basic insurance policy for drivers who fall into the average risk profile. Standard auto insurance policies are typically less expensive, meaning lower premiums, than other types of auto insurance since the drivers usually have a better driving record and few-to-no accidents.

Conversely, nonstandard auto insurance is a policy for vehicle owners who have a poor driving record and comes with higher monthly premiums versus standard policies. However, there is often a third category of drivers called preferred drivers, who are considered the least risky based on their driving history and vehicle usage characteristics. Preferred drivers are usually offered even lower premiums than standard and nonstandard policyholders.