How Car Insurance Companies Determine Your Premium

You pay $300 a year more than your friend for auto insurance, and he has the same driving record as you and covers the same number of cars.  Why is that?  Insurance companies have specific methods and rating systems for figuring out how much their insureds should pay for auto coverage.  They include a variety of factors in their calculations and no two drivers are exactly the same.

Auto insurance companies measure the “risk factor” of a driver by studying common characteristics of those who have filed claims in the past.  For example, if a company studies 1000 drivers who have had accidents, and determines that 80% of them had a history of prior accidents and traffic violations, they may conclude that drivers with such a history have a higher probability of a future loss, making them a greater risk to insure.  Thus, there is reason to charge them a higher premium.

Factors insurers take into account when determining premiums
There are many factors, including, of course, one’s driving record, that go into the determination of a premium for auto insurance coverage.  The list below, while not exhaustive, will give you a general idea of what is factors contribute to making a driver a higher risk, thus subject to a higher premium.

•    Male vs. Female drivers (males are typically charged more because they drive faster on the whole and have more accidents.
•    Single, unmarried drivers (Statistics show that such drivers are less cautious and get more tickets)
•    Drivers with moving violations, DUIs, DWIs, accidents
•    Residents of communities with a high number of accidents (In general, urban residents pay higher rates than those in the suburbs or in rural area due to more accidents and more thefts)
•    Lapse in auto coverage
•    Little driving experience
•    Foreign license
•    Vehicle used in the scope of business (Not just for commuting, but during the course of the day for work)
•    Young drivers (teens are notorious for having more accidents and getting more tickets than older drivers and, therefore, the premiums are much higher.)
•    Type of car—The following cars are rated higher in terms of premium charges:
o    Sport
o    Luxury
o    High value
o    Foreign
o    Salvaged
o    Exotic
o    Cars with kits and replicas
o    Experimental cars
o    Commercial vehicles

Lowering your premium by becoming a “better risk”
Auto insurance companies use vehicle statistics to determine what factors are considered high risk and to establish the appropriate premium. You can be proactive and take steps to reduce the chances of a high premium. Ways of becoming a better risk, thereby lowering your premium, include keeping a clean driving record for at least three years, avoiding accidents (of course), and avoiding the types of vehicles on the list above.  Taking a defensive driving class could help, as well.  A driver's personal situation may differ from others’ so it is important to be aware of the variables that can affect the cost of auto insurance and do everything you can to become a better risk.  That will save you money in the long run.