Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insuranc...

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Melanie Musson is the fourth generation in her family to work in the insurance industry. She grew up with insurance talk as part of her everyday conversation and has studied to gain an in-depth knowledge of state-specific insurance laws and dynamics as well as a broad understanding of how insurance fits into every person’s life, from budgets to coverage levels. Through her years working in th...

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Reviewed by Melanie Musson
Published Insurance Expert Melanie Musson

UPDATED: Mar 13, 2020

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Very few bills vary as much from one customer to the next as car insurance. Insurance premiums are calculated based on a complex algorithm that takes into account an individual’s driving history, demographic information, geographic location and dozens of other factors. In most cases, the rates are calculated by a computer, so no one can accurately predict exactly how much your insurance will be before you obtain the policy. Even free quotes online are often not the same as the final premium once the deal is finalized.

Why are so many factors involved in determining car insurance rates? How can you control the price of your insurance? By understanding a little bit about how insurance works and what your company is looking for, you can start to save money on car insurance.

How Car Insurance Works

An insurance company collects premiums from customers on the promise that it will pay for damage incurred according to the coverage purchased on the policy. This contractual agreement means that the company is obligated to pay you whatever it agreed to when the policy started if a claim is filed. The money collected from premiums is pooled to cover damage to all the vehicles insured with the company; the insurance company may also invest the money from premiums.

When a car insurance company insures your vehicle, it is taking a risk. Ideally, the company would be able to collect premiums for many years without ever paying a claim. The fewer claims that need to be paid, the more money the insurance company has available to invest and thus profit on.

Because of this, car insurance companies base premiums on risk. The higher risk a person poses of filing a claim, the more the insurance premium will cost; this helps to balance the risk of insuring that individual. People who drive safely for many years are probably less likely to be involved in accidents, so their rates will be lower.

What factors influence the cost of my premiums?

For the most part, every factor involved in determining your insurance premium is related to your likelihood of filing a claim. In some cases, this may be due to your driving habits; in other situations, this could be due to your finances or other factors. Because the interplay of factors is so complex, your agent may not be able to tell you exactly what caused your rates to increase or decrease at any specific time. Nevertheless, some items are more likely to cause a rate increase than others. There are dozens of factors, but here are some of the most common:

  • Your driving history, especially any accidents, traffic violations or DUIs.
  • Your credit score; people with poor credit may be statistically more likely to file claims for minor damage
  • Your age; drivers under 25 get into more accidents than older drivers
  • Where you live; areas with congested traffic, bad weather or high crime have higher rates
  • What kind of car you drive; more expensive vehicles cost more to insure
  • Any safety features your car has, such as anti-theft devices or backup sensors

Your driving habits account for the majority of your rates. Even if the other factors are not ideal, you will see your rates improved over time as long as you maintain a good driving record. Even if your driving record is not ideal, you can repair damage caused to your premiums by accidents or traffic violations by continuing to drive safely.

In the short term, you can lower your car insurance rates by taking advantage of any discounts your company offers. You may be able to save money by purchasing multiple policies through a single company, such as motorcycle or homeowner’s insurance along with your auto coverage. Or you could obtain a discount in some cases by taking a defensive driving course or other type of advanced driver’s education.

Of course, if you have been insured with a company for several years and are accident-free, you may qualify for safe driving discounts. You can ask your agent if there are any ways for them to lower your rates as a reward for your driving history; in most cases they will be happy to work with you to find discounts.