How does the insurance company determine my premium?

Are you wondering, "how does an insurance company determine my premium?" There are several factors that determine premiums for car insurance. These factors can include your driving history, your age, your location, your credit score, and how often the vehicle will be used. There is no one formula for how to calculate rates but you can use premium calculators to find estimates.

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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 a professional writer.

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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. Brad is licensed in all P&C lines.

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Reviewed by Brad Larsen
Licensed Auto Insurance Agent Brad Larsen

UPDATED: Apr 15, 2022

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Things to Know

  • Your auto insurance premium depends on your driving record, age, medical history, history, location, and more
  • Car insurance premiums are based on how much risk a policyholder is and the likelihood of the policyholder to incur a claim or claims
  • An insurance score can be used to determine your rates

One of the most common questions asked by insurance shoppers is, “How does the insurance company determine my premium?”

Car insurance rates differ from person to person. Premiums are determined by a number of factors, such as the type of vehicle, your age, and even your credit score.

If you’re confused by how car insurance rates are calculated, you’re not alone. Everyone wants to save money on car insurance, but you might not be sure how to go about it. We’ll help you to understand the factors that affect your rates, including which ones are out of your control and which you can change to get a better price.

Compare car insurance premiums from multiple companies in your area by entering your ZIP code in the free tool above.

How are premiums determined for car insurance?

The formula for calculating car insurance rates varies between insurance companies, but it will always include your driving record, factors about the vehicle itself, how much a vehicle will be used, and where you live.

Insurance scores are also sometimes used to calculate car insurance premiums. An insurance score is a ranking that predicts your personal potential for insurance loss.

Your car insurance premium, also called your rate, is the amount of money you pay for your policy. To determine what your rates will be, you have to know the factors involved in the calculation.

Premiums are calculated based on a number of factors:

  • Your driving record: This includes how long you’ve been a driver, any previous accidents or claims, and tickets and/or traffic violations on your record.
  • How much your car is used: Rates are affected by the estimated amount of time your vehicle will be on the road daily, including your commute length.
  • Where you live: The risk of a claim can differ based on where you live, which includes things like theft rates.
  • Age: Younger drivers tend to be higher-risk, which is why cheap car insurance for young drivers can be harder to find.
  • Gender: Females typically pay lower rates than males, since, statistically, they present a lower risk.
  • The type of car: Sports cars, luxury cars, or even custom cars may have a higher premium because repairs are typically more costly.
  • Your credit score: Credit scores have been statistically linked to the likelihood of a claim, with better scores representing greater stability and responsibility.
  • The type and amount of car insurance coverage: The more coverage you choose, and the higher the limits on your policy, the more it will cost.

Some states have enacted laws that prevent car insurance companies from using things like your age, gender, and credit score in rate calculations.

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How to Calculate Car Insurance Premiums

There is no single formula or equation to find your premium. That’s because car insurance companies use their own calculations and statistics to calculate the amount charged for insurance.

Each insurance company decides which factors it will use and how much weight it will give to each factor. That means that a speeding ticket will increase your rate more at one company than another, depending on how each company weighs that factor.

That means there is no singular, “how to calculate insurance premium” formula.

Car insurance companies can also use credit-based insurance scores to calculate rates. The credit score for insurance differs from what is used, for example, to get a credit card.

According to the Insurance Information Institute, insurance scores predict insurance losses, whereas credit scores predict credit delinquency. Credit-based insurance scores pull information from your credit report and measure the likelihood of you reporting a claim.

Your insurance score can be determined by these weighted factors:

  • Payment history
  • Outstanding debt
  • Credit history length
  • Pursuit of new credit
  • Credit mix

A good score will mean lower rates, while a poor one means you will pay more.

How to Calculate a Premium in General for Insurance

Each car insurance company has its own method for determining premiums, but premium calculators can be used to estimate your rates.

In order to use a premium calculator, you’ll need your vehicle’s:

  • Make/model/year
  • Location
  • Year the vehicle was purchased

You will also need to enter some facts about yourself as a driver and your driving habits. Of course, these calculators will only provide you with a general idea of rates.

If you want to know how to calculate the premium percentage for popular discounts, you’ll need to gather the discount amounts from the companies you’re comparing.

The Bottom Line: How does the insurance company determine my premiums?

Calculating your car insurance premium comes down to several factors, including your driving record, location, age, gender, and even your credit score.

Car insurance companies weigh each of these factors differently, so how they calculate your rates will vary.

While there is no car insurance premium equation, you can take advantage of premium calculators. Premium calculators use basic information about your car and driving habits to provide a general idea of how your rates will look.

If you know your driving history, credit score, age, gender, location, and how much your car will be used, you can guess whether your premium will be more or less than the average rate.

However, you will need to compare car insurance quotes from insurance companies to get a real idea of how much you will pay and which company is the best deal for your needs.

Type your ZIP code in the free tool below, and we’ll calculate some car insurance quotes specifically for you.

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