How are car insurance premiums calculated?
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UPDATED: Mar 13, 2020
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Auto insurance premiums are based on numerous factors, and the cost of a policy is unique to each individual insured. This means that no two people will pay exactly the same amount for car insurance. It also means that rates may change over time depending on your driving habits.
Although you can receive a quote for your insurance policy before purchasing coverage, it’s more difficult to get a clear picture of how your policy may change over time. An agent can give you an idea of what might happen to your policy if you’re involved in an accident or install an anti-theft device on your vehicle, but you will never know the exact price of the policy until the changes have been made.
The reason for this is that car insurance premiums are determined by a computer, not by the agent or customer service department. Whenever an auto insurance company calculates premiums, they fill out all of the insured’s information into a computer program; this then runs through an algorithm and the final cost of insurance is calculated. The agent may be able to provide a rough idea of whether or not a specific situation will cause a rate increase or decrease, but the final premium will be unknown until the changes actually occur.
The process of determining rate increases is called underwriting, and it occurs at each policy renewal. This is why premiums only change at the end of the term rather than immediately after an accident. Whenever a change occurs to an insured’s situation partway through a policy term, that change will be marked as an underwriting referral. You may receive a phone call each year before your policy renews asking questions such as how many miles you drove that year, who in your home has access to the vehicle or other questions about your driving habits. This phone call will help the underwriting department determine how much your insurance should cost.
What Factors Influence Car Insurance Premiums?
Auto insurance companies determine the cost of auto insurance by assessing risk. A high-risk driver is one who has the highest likelihood of being involved in an accident. People who file multiple claims in their lifetimes cost the insurance company more money than people who do not need to file claims. A driver’s risk is determined not only by their own driving history but also statistical factors related to their age group, geographic location and more.
Multiple things affect risk calculations, and different factors are weighted differently. Here are a few of the main things that the underwriting department will assess when updating your information in their computer system:
— Your driving history, including accidents, citations and DUIs.
— Your age and the age of others who have access to your vehicle
— Where you live, including the city, state and neighborhood
— The driver’s gender and marital status
— The driver’s credit history
— The year, make and model of the vehicle
— The vehicle’s safety ratings
— Any anti-theft devices installed in the vehicle
— Whether the driver has taken any advanced driver’s education courses
Not all of these factors are assessed equally. A safe driver will nearly always pay lower premiums than a driver with a history of accidents, even if the safe driver has other risk factors. Premiums may also not increase equally. For example, a single car accident may cause a greater rate increase for a formerly-safe driver than for someone who already has a history of accidents.
This occurs because most insurance companies offer safe driver discounts for people who are accident-free. After an accident occurs, the discount will be lost and a premium increase will be added, leading to a more dramatic overall rate increase.
Auto insurance can be complicated, and the formula behind rate calculations is determined by the insurance company’s computer system. Although the exact effect of any single event may not be known in advance, you can discuss your specific situation with the insurance company to get a rough idea of what you can expect whenever your policy goes up for an underwriting referral.
Maintaining safe driving habits is the best way to keep your premiums low. You can also enroll in defensive driving courses, install anti-theft devices onto your vehicle or take advantage of discount programs offered by your insurer. By focusing on good driving habits, you can keep your premiums low and counteract the effect of things outside of your control, like your age or where you live.
If you’re paying too much for auto insurance, you may be able to save money by swapping to another insurance company. You can begin by obtaining a free quote online; comparison shopping will help you identify the best deal for coverage to suit your needs.