How Do Car Insurance Companies Calculate Rates?

As a responsible driver, you pay for car insurance every month. And as a prudent consumer, you probably shopped around to multiple car insurance providers before you settled on the provider with the best rate.

But did you ever wonder why you were given the rates you were? How exactly do car insurance companies calculate rates?

Why It Matters

Most consumers have the mentality that their car insurance rates “are what they are.” After getting quotes from multiple providers in the same ballpark, they may feel there’s no real incentive to learning more about the process; after all, your knowledge alone isn’t enough to change what you’re paying.

However, learning how your rate is calculated might guide you to select a better policy for your needs, ruling out quotes and plans that provide excessive coverage, or those that skimp on key areas. It can also help you find ways to reduce your rates over time, if you know your weaknesses and work to improve them.

Variables That Affect Your Rate

While each provider has a unique, proprietary formula for calculating risks and rates for their individual drivers, these are some of the most common variables that get factored in:

• Coverage continuity. Having gaps between coverage is considered a risk factor by most car insurance providers; it’s a sign you aren’t able to afford insurance, or that you’re willing to drive in risky conditions. Some companies actually go out of their way to reward coverage continuity; for example, King Price Insurance offers discounts to drivers who remain insured with them for prolonged periods of time.
• Your driving record. One of the biggest factors insurance providers consider is your past driving record. If you’ve been driving for years without any accidents or major violations, you’re going to get a much lower rate. On the other hand, any kind of violation—such as an accident, a DUI, a moving violation, or a suspended license—could increase your rates substantially.
• Your choice of vehicle. Your choice of vehicle can also play a role in the amount of insurance you pay, and for several reasons. Some cars, like sports cars, are more likely to be driven recklessly than others, and are therefore more likely to be involved in an accident—which means you’ll pay a higher rate. And some models of vehicle are more likely to be stolen, which could also translate to a higher rate.
• Where you live. Some areas are at higher risk for traffic accidents than others. If you live near a busy intersection on the outskirts of a major city, you’re going to pay a higher rate for auto insurance than someone who lives in the middle of nowhere.
• Your occupation. You might not think your occupation has much to do with your risk profile (unless you’re a stunt driver), but it can play a major role in what you end up paying for insurance. For example, doctors and surgeons often pay more for car insurance because they’re often on call for their job, and may be required to drive on high stress and little sleep.
• Your annual mileage. While a straightforward statistical analysis isn’t always possible for this dimension, there’s a clear correlation between the number of miles you drive and your risk for being in an accident. The more miles you drive per year, whether it’s for work or leisure, the more you’re going to pay for insurance.
• Your age and sex. Statistically, men are more likely to be involved in traffic accidents than women, so they typically pay higher rates. There’s not much you can do about this one. Also, some age groups are at higher risk of an accident than others; if you’re under 25 or over 65, you’ll probably end up paying more.
• Credit and grades. Some providers use secondary indicators of personal risk when calculating insurance rates. For example, they may look at your credit score as a measure of reliability, or look at your grades if you’re still in school.
• Your choice of policy. Obviously, the type of policy you choose will also affect the rates you pay. As you might suspect, the more coverage you get, the more you’re going to pay in monthly premiums. Your deductible will also play a role in this; the higher it is, the less you’ll pay per month.

The more you know about your car insurance rates, the more you can do to reduce those rates—and maybe even end up with a more appropriate policy for your needs. Consider learning more by talking to your insurance agent, and asking critical questions about your policy, or by shopping around for more providers before settling on a final insurer.