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How Do Auto Insurance Companies Determine Your Insurance Rates?

How Do Auto Insurance Companies Determine Your Insurance Rates?

You might just be aware of factors like your age, driving history, and collection of traffic tickets that determine your auto insurance rate. However, these are just a few factors in the calculation of insurance rates. Read more to know how insurance rates are determined, and which other factors can increase or decrease the rates.
Neha Deshpande
Did You Know?
If you switch auto insurance policies, and don't cancel the previous policy, it will be added to your credit report as 'canceled due to non-payment'.
If your car insurance needs to be renewed, and you are wondering how much you are going to have to shell out this time, then maybe you should consider how your car insurance is determined. Like all insurance companies, auto insurance companies also calculate the rate based on risks. The most important factor is the likelihood of a customer, or a group of customers, making a claim, and the amount of the claim made.

Calculating insurance rates depend on many factors through which the insurance company predicts your likelihood of getting in an accident. These calculations are done based on all the statistics the company has collected over time.

How are Car Insurance Rates Determined?

The whole calculation depends on which kind of coverage you opt for. Are you looking for a coverage that will just pay for repairs to the damage caused? Or do you want a policy that will take care of everything from damages, court fees, and so on? Once you have decided the type of policy, the insurance company will use a formula and tell you how much you have to pay.

Most insurance companies use their own formula to decide the amount of premium that needs to be made, however, they use one of the following two methods to arrive at the base premium.

In the first method, the make and model of your car is taken into account. The more expensive the car, the higher the premium, and vice versa. Along with the details of your car, general information about previous accidents is also considered to arrive at the base premium.

In the second method, calculations take into account the current market value of your car to arrive at the base premium. Other details like the number of accidents are a factor in this method as well.

Factors that Affect Car Insurance Rates

Using one of the methods listed above, insurance companies arrive at what is known as the base premium. However, this figure is not the final premium you pay. There are many other considerations that affect the final premium you pay, and these typically include the ones mentioned below. Of course, you have to keep in mind that insurance companies will not divulge all their calculations, and calculations may differ from company to company.

Your Age

Your age will play a major role in the amount you may have to pay as a premium. Typically, if you are below 25, then you can expect to be paying a higher premium. Likewise, if you have crossed 50, the premium will be higher. Adults in the range of 26 - 49 get the most competitive rates, though this depends on other factors as well.

Your Car

The next factor which affects your premium significantly is the make and model of the car you have. Expect to pay a higher premium for a new sports car, as the chances of it being damaged or stolen is higher than other economy cars. Luxury car owners can expect to pay a higher premium for their car insurance as well.

Your Gender

Though this factor may surprise you, it is one of the factors that insurance companies do use to arrive at the final premium. And more surprisingly, male drivers have premiums that are higher than female drivers. Though many people consider women as riskier drivers, the fact is that tend to more careful than men, who are considered risky and rash by auto insurance companies.

Your Driving Record

Another factor that can send your car insurance premium skyrocketing is your driving record. A higher number of accidents, or even violations like speeding tickets, DUIs, breaking traffic lights, etc., can result in a higher premium. Insurance companies view such drivers as unstable, and hence find them to be a higher risk than most. Drivers with a clean record may find their insurance rates significantly lower than drivers with a record.

Your Neighborhood

Another surprising point taken into consideration by the insurance company is the area you live in. If your neighborhood has a high crime rate, then you can expect to be paying more to insure your car. Depending on the rate of crime and vandalism in your locality, your premium will differ.

Your Credit Rating

Credit rating is another factor that auto insurance providers look at while quoting a premium to you. If you are on the lower side of the chart, then you can expect have a higher premium. A good credit rating not only makes it easier for you to avail auto insurance, but makes it easier to get a good deal with a lower premium as well.

Your Marital Status

This is one of the lesser known factors that can influence your insurance rate. Typically, married individuals get a slightly lower premium than people who are single, which can be attributed to the fact that married individuals are considered more stable and hence, less risky.

Your Car Safety Rating

Just like the make of your car is taken into consideration to arrive at your final premium, the safety rating of your car is also an important factor that is taken into account. If your car has a high safety rating, your premium will be reduced by a bit. Cars with a low safety rating are considered high-risk in insurance circles.

Your Driving Pattern

Your driving pattern is another factor that will influence how much you have to pay to insure your car. If you are in sales and have to travel by car frequently, then you can expect the premium to be high. This is because of the simple fact that the longer you are on the road, the more chances are there for accidents to happen. Insurance companies take into account the number of miles you cover a month or year while deciding premiums.

History with the Company

And last, but not the least, your history with the company will also be a factor that will decide your final premium. If your car has been insured with the same providers for quite a significant period of time, then they have the data to evaluate the claims you made in that period. If the number and amount of claims are low, then you can expect a reduced premium. In some cases, just being with the same provider for a significant amount of time can get you a reduced premium as a loyalty bonus.

Before you settle for an auto insurance provider, you should compare quotes from a few companies that provide auto insurance. As mentioned earlier, every company has a different way of calculating premiums, and hence every company will have a different rate. The above factors are the main ones when it comes to determining your insurance rate, but be advised that the weightage on each factor may be different for each company.