How Are Auto Insurance Premiums Calculated?


Even when using a car insurance calculator, it should be noticed that auto insurance rates vary depending on a number of factors and how premiums are calculated is different from one auto insurance company to the other. However there are certain common elements which all auto insurance companies use to calculate premiums.

Every application for auto insurance is evaluated by a number of variables according to the risk formula created by the evaluating auto insurance company. These factors include your age, your driving record, credit history, the type of vehicle insured and more. Understanding how auto insurance premiums are calculated can be a little tricky since there is no formula that fits all however once you understand the variables which auto insurance companies look at then its possible to find ways it improve your risk profile. The one thing that is common between all auto insurance companies is the lower the risk you pose of filing a future claim the lower your auto insurance rates will be.

What do auto insurance companies consider when calculating auto insurance rates?

The actual list of variables auto insurance companies use to calculate premiums is pretty long and most of these only play a minimal role in your overall premiums. However there are some which greatly influence the cost of your auto insurance including:

Where you live

All states have different auto insurance laws which play a big role in the liability exposure of an auto insurance company so base premiums will vary depending on where you live. Auto insurance can vary by 200% or more depending simply on what ZIP code you reside.

Your Driving History

It’s important to keep a clean driving record. Not only will you reap the benefits of a good driver discount but also be able to choose from the largest number of providers. All auto insurance companies love good drivers and the better your driving record the more choices you have for auto insurance.

Your Credit Score

While on the surface your credit score may have nothing to do with your driving skills it has been proven that drivers with bad credit have a higher risk of filing a future claim. While you may not be able to do much about your current financial situation there are always ways to improve your credit report by disputing information and requesting proof of any negative information from the credit bureaus. A good credit score is vital to maintain your ability not just to buy auto insurance but also get auto loan financing, rent an apartment, secure credit and more. Always pay attention to your credit score as a bad credit score can do nothing but provide headaches and cost you more money.

The Type of Vehicle Insured

What type of vehicle you are insuring also makes a big difference in the cost of auto insurance. There are a number of variables in play when auto insurance companies look at the type of vehicle including its replacement cost, prior insurance claim history for the make and model (from all drivers), vehicle safety ratings and more.

Your Gender

Auto insurance companies certainly cannot discriminate on sex alone but your gender certainly plays a big role in the risk factor as women drivers have been proven to be less likely to file a claim. Given all thing equal in a car insurance application women drivers almost always pay lower rates simply due to the lower risk of insuring this gender.

How much the vehicle will be used?

Most auto insurance coverage assumes a driver will commute around 12,000 miles annually in a vehicle. If you work from home you may qualify for a low mileage policy which can save up to 50% or more in premiums whereas as if your travels consist of more than 12,000 miles a year you may end up paying more. The logic here is the more time a vehicle is on the road the higher chances of filing a claim.

How the vehicle will be used?

This is much different than how much you drive and pertains to how the vehicle will be used. Drivers who use the vehicle for typical stuff like commuting to work, picking up the kids and doing errands have no worries. However if you plan on using your new pickup truck to carry around business equipment then there is a much higher. Should you plan on using your vehicle for any reason outside of typical use always inquire with your auto insurance company about what is/is not covered.

There are many other factors which contribute to your auto insurance premiums and the cost of auto insurance can be different from one provider to the next so it’s hard to say exactly how much your auto insurance will cost without looking at your overall profile. The good news is that there are over 100 auto insurance companies in most states and good drivers have a wealth of options to choose from. Always compare auto insurance quotes from several providers before selecting a policy and ask about the reasons for any high risk assigned to your profile. This can open your eyes up to ways to improve your profile and help save you money on auto insurance now or the next renewal period.

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