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What is Tier Rating?
The Automobile Insurance Cost Reduction Act of 1 998 (AICRA) changed the way insurance companies do business in New Jersey by creating a tier system to determine rates.
Under the tier rating system, insurers assign drivers to different tiers, or rating levels, based on a number of risk characteristics. Tier rating systems take the “complete picture” into account to identify a good risk, rather than simply penalizing drivers for accidents and motor vehicle violations.
What factors determine what tier I’m in?
Insurers can consider a number of risk characteristics, including driving record, years of driving experience, vehicle type, coverage limits, claims and credit history when determining a driver’s tier placement. Other factors, like age, gender and marital status, may also impact an individual’s rate within a specific tier.
Do all companies use the same tier characteristics?
No. For example, some insurers use an “insurance score” (see page 17) based on a driver’s credit history, while others may emphasize factors such as driving record and claims history. Insurers are permitted to establish their own tier rating criteria as long as they can show that they are not arbitrary, capricious or unfairly discriminatory. Insurers also have to show that tiers are reasonably based on loss experience — meaning that the guidelines they use to place drivers in specific tiers are substantiated by the losses the companies actually incur.
How many tiers can a company have?
Tier systems can vary greatly from company to company. Auto insurers have developed a number of ways to evaluate risk; risk characteristics considered important to one insurer don’t necessarily carry the same weight with another. This makes it important for consumers to shop around, as insurers’ tier systems and rates can vary considerably.
What is a “standard” tier?
A “standard” tier is a tier that represents the company’s base rates. Drivers with favorable risk characteristics may qualify for preferred or lower-rated tiers, while drivers with less favorable risk characteristics may be placed in higher-rated tiers.