How do car insurance companies calculate rates?

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Tonya Sisler has a Bachelor’s Degree from the University of South Carolina in Journalism and has worked for 15+ years in management. She has also completed a proofreading certification and is currently...

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Brad Larson has been in the insurance industry for more than a dozen years. He started out as a claims adjuster for a national carrier. He has since switched to the agency side of the business...

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Reviewed byBrad Larsen
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UPDATED: Mar 13, 2020

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In a nutshell...
  • Car insurance companies use different variables to calculate your premiums
  • Your driving record, where you live, and even your marital status can affect how much you pay
  • It’s a good idea to compare at least three different quotes before making a final decision

Car insurance companies calculate different rates for different drivers so who qualifies for cheap car insurance?

While affordable car insurance is the goal of many there are always drivers with much cheaper car insurance rates, so how do car insurers actually calculate rates?

Car insurance premiums are based on risk and no single factor accounts for the final premium a driver will pay.

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How do car insurance companies calculate premiums?

However, collectively these variables (well over 100 possibly even 1,000 or more) are all used in the risk formula car insurance companies use to assess a policy premium to your application.

This formula consists of items such as:

  • Your Driving Record
  • Your Credit Score
  • Make and Model of Vehicle
  • Year of Experience
  • Where you live
  • How often you drive
  • Number of Household Drivers
  • Vehicle Use
  • Eligible Discounts
  • and more…

Some drivers critique the auto insurance industry stating they have a spotless driving record and should be entitled to the cheapest car insurance rates but this is really a pointless discussion.

So much about risk has nothing to do with you as a driver but a collective analysis of the whole environment you and your vehicle will be exposed.

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Most all accidents happen without any notice and statistics show much more accurate data than personal opinion when it comes to risk.

Risk is defined by auto insurance companies as “the risk of an applicant to file a future a claim”

Think about this, in areas with high rates of auto theft how do your superior driving skills reduce the fact a vehicle is exposed to a higher chance of theft?

What impacts my monthly car insurance premiums?

This is just one factor of the car insurance premium formula and certainly, you can agree there is a higher risk to insure you based on the question above. The odds are simply greater you will file a claim of stolen property than someone who lives in a lower risk environment.

The good news is that you are not always exposed to bad risk factors, which increase your car insurance premiums.

You can also take advantage of low-risk discounts such as:

Once you add the high risk + low-risk factors then a car insurance company can determine how much your premiums will be. This will stay in the same range for most drivers but any number of factors can swing your premiums higher or lower.

While car insurance premiums are very important to your budget they are also one of the final things you should look at when comparing car insurance quotes.

The key to car insurance comparison is to do your homework, compile a list of your policy needs and then compare quotes with equal coverage.

If the policy details look the same then it’s a true comparison otherwise it’s very easy to be influenced by the promise of cheaper car insurance rates only to end up with a policy with much lower coverage than you require.

Ready to compare quotes? Enter your zip code below and compare car insurance quotes online for FREE!

References:
  1. https://one.nhtsa.gov/Data/National-Driver-Register-(NDR)
  2. https://www.geico.com/save/discounts/car-insurance-discounts/

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