Final answer:
Auto insurance rates differ based on several factors such as safety ratings, driving and vehicle history, and driver age. Insurance companies classify drivers into risk groups to more fairly distribute premium costs in relation to potential claims. This ensures that high-risk drivers pay more than those posing lower risks.
Step-by-step explanation:
Auto insurance rates are based on a variety of factors including the car's safety rating, the driver's history, vehicle history for used cars, and the driver's age. Young drivers tend to have higher rates due to less experience. Insurance premiums are calculated to cover the risk of potential future claims; therefore, individuals that are categorized into higher risk groups will generally pay more.
For example, if a group of drivers with varying accident histories paid the same premium, those with low damages would subsidize those with high damages. Therefore, insurance companies classify people into risk groups to charge lower premiums to those with lower risks. This practice ensures fairness and helps insurance companies manage their overall risk.
A simplified example would be a group of 100 drivers incurring different levels of damage, from $100 for minor dings up to $15,000 for large accidents. Without differentiating risk, the total damage of $186,000 would be divided equally among all drivers. But with risk classification, each driver would pay a premium more accurately reflecting their actual risk level.