Final answer:
The numbers in liability insurance represent policy limits for bodily injury per person, total bodily injury per accident, and property damage per accident. Risk classification by insurance companies aims to equitably distribute costs among drivers with varying risk levels, preventing lower-risk drivers from subsidizing higher-risk ones.
Step-by-step explanation:
When you see numbers like 100/300/500 in the context of liability insurance, they refer to the policy limits in thousands of dollars for various coverage types within a liability insurance policy.
The first number (100) typically represents the maximum payout for bodily injuries per person, the second number (300) the maximum payout for bodily injuries per accident, and the third number (500) the maximum payout for property damage per accident.
In a hypothetical scenario, an insurance company might classify drivers into risk groups to determine premiums. Without risk classification, everyone pays the same premium, which might put lower-risk drivers at a disadvantage because they effectively subsidize the high-risk ones.
For example, if a group of 100 drivers all pays $1,860 in premiums and the total damages are $186,000, those who only had minor accidents are paying disproportionately compared to those who caused significant accidents.
This system allows the insurance company to pool the risks among all insured drivers and to charge premiums accordingly to cover the collective cost of accidents within that group.