Bayes Law in Car Insurance
Your 16th birthday is right around the corner and your parents ask what you want for your birthday. Without hesitation you plead for a car. After much thinking, your parents say yes but only under the condition that you pay your own insurance. You look up the average cost of car insurance and see a hefty $136 on your computer screen.
You take a deep breath and realize. Hey it’s no big deal, I will just start saving up more and picking up more hours at my minimum wage job at the retirement home. You argue to yourself that time will fly by anyway now that the idea of BINGO and Splenda-sweetened iced-tea does not seem too bad.
Comes time to your birthday and to your surprise, you actually see a new (used) car! It’s everything you wanted! It drives! And it…. Um… that’s pretty much everything you asked for. You can’t stop hugging your parents until you try to make your first insurance payment and see the request for $215???????
“HOW COULD THIS HAPPEN”, you think to yourself. You immediately start thinking about the hours and hours at the retirement home. You can’t help but to think about how everyone is waiting for the car you’ve been raving about. You thought you did your research, so where did this go wrong?
The insurance company knows you are a teenager and teenagers are more prone to accidents as they are new drivers (AKA high-risk drivers). When calculating their insurance price for you, they used a set of ideas called Bayes Law to evaluate your charge.
As insurance companies can be liable for taking care of hefty bills regarding accidents and car damages, they make sure to be very strategic when yielding a price.
They evaluate the probability that you will get injured in a car GIVEN that you are a new and teenage driver. Ultimately, this brings the probability to be higher than average as it is contingent on the knowledge of your age and experience. This is called CONDITIONAL PROBABILITY. This is a common practice among many car insurance companies.
After learning about Bayes Law, you realize the logic and decide to pick up a couple more shifts at the retirement home. Anyway, time goes by faster knowing there’s a car waiting for you to drive home! BINGO!
https://www.carinsurance.com/Articles/adding-teen-driver-cost.aspx