Auto Insurance

How Insurers Calculate Your Car Insurance Rate?

Written By: Eric Williams
Reviewed by: Mike Reyes
Last Updated December 26, 2022
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red Mercedes-Benz coupe on road

One of the most confusing things for new drivers is not the clutch and stick drive but the complex car insurance pricing system. The coverage comes with the policy, but the price is different. Some people can get a policy for half of what others are charged. 

Car insurance, or any insurance for that matter, is a dynamically priced service. It means that the prices vary for different people, and the price of the policies also keeps changing even for the same person. 

The price of auto insurance policies is just like time; constantly changing.

But what’s the entire process behind determining the insurance rates? How do companies decide what should be the optimal price of a policy for the policyholder?

This article will look at how insurers calculate your car insurance rates. 

Not only will this help you understand the complex process of pricing insurance policies, but it will also give you the insight to help you save money while you purchase car insurance. Let’s get started. 

Factors Affecting Car Insurance Rates

Auto insurance companies have a set of multiple factors that help them determine the chances or probability of getting in a car accident and making an insurance claim and the cost of the claim. 

While it is complicated to know all the factors that insurance companies consider to determine the rates as the factors vary by auto insurers, we do know that there are some universal factors that contribute the most to the pricing of the policy

Let’s take a look at all the factors and how they affect your insurance rates. 

Driving Record

Your driving record is the most potent and essential factor considered in determining your car insurance rates. A good driving record can help you in saving hundreds of dollars in auto insurance policies, and a bad driving record can add hundreds of dollars more to your insurance bills. 

The car insurance company looks at all the relevant data that shows how many road accidents you have been in, points on your driving license, speeding tickets, rash driving cases, driving under the influence charges, etc. 

Auto insurers do not leave a stone unturned. From the tiniest of misdemeanors on the road to the most severe and dangerous road accident you have been in, everything is considered while determining your insurance rates. 

Minor accidents, speeding tickets, etc., increase your insurance rates by a little, while serious accidents, DUI charges, etc., can take your insurance rates sky-high. 

Past Insurance Claims

All the insurance claims you have had in the past are also considered while deciding your insurance rates. The insurer looks at what the accident was, who was at fault, and how much did the previous insurance company pay for the claim. 

All this data is available in your CLUE report by the company LexisNexis, and you can also access this report once every year to check if there are any false incidents reported. Insurance claims increase your insurance rates.

If you have already made insurance claims before and need help finding affordable insurance companies, finding the best insurance companies and comparing their rates is the best way to choose the best insurance company. 

For example, search for Illinois cheap car insurance if you are a resident of Illinois to get the list of all the great car insurance companies, compare the coverage they are offering and their rates, and select the one that suits your needs the best. 

Age

The phrase “With Age Comes Maturity” could not be more true for car insurance policies because auto insurance companies take it very seriously. Auto insurers charge young people more, and auto insurance rates start to decrease as their age increases. 

Young people (especially teenagers) are most likely to get in a car accident, according to statistics. Hence car insurance rates are the highest for people under the age of twenty-five. 

If you are a teenager and don’t want to spend more on insurance policies, the best thing you can do is drive safely and wait a few more years.

Gender

Auto insurers look at the statistics to determine insurance rates. Gender plays a significant role in determining car insurance rates. Statistically, women are less likely to be in a car accident than males. 

Hence, car insurance companies charge more if you are a male. Sadly, there is nothing we can do about this. 

Location

Some areas are safer than others, and some areas are hazardous both for driving and parking your car due to high theft rates. It is logical for auto insurers to consider the locality of the policyholder as a factor. 

People living in localities where the theft rate is high are charged more for car insurance than people who live in safer areas. The price of collision coverage and comprehensive coverage are most affected by the locality of the policyholder. 

Make and Model of Vehicle

The make and model of the car have a direct effect on the pricing of the car insurance policy. Larger vehicles that are more expensive to repair or reimburse cost more to insure. Auto insurers look at multiple aspects of the car, considering the safety features, theft rates, spare parts cost, etc., and then set the price accordingly. 

Auto insurance companies look at these aspects of your car:

  • Engine size
  • Car size
  • Safety features
  • Theft rate
  • Repair costs
  • Price (MSRP and Actual Cash Value)

Credit Score 

Many states consider the credit score of the policyholder to set the premium rates. People with poor credit scores are charged more, while people who have good credit scores are charged less. 

It seems counterintuitive; people with poor credit scores are certainly not in a great financial position, so why charge them more? It is the reason why many states, such as California, have stopped auto insurers from using credit scores as a factor in deciding auto insurance or premium rates.  

Other Miscellaneous factors

There are some other miscellaneous factors that auto insurance companies might consider while deciding the quote of the insurance policies. There are some discounts that people can get for having safety features, such as an anti-theft system, ABS, etc., in their cars. 

Some insurance companies offer “Good Students” discounts, offering lower rates to college students with good grades, while some companies offer discounts to people affiliated with certain institutions. As mentioned earlier, these factors vary a lot. 

So that was the framework of how car insurance companies calculate your auto insurance rates. Remember that insurance rates are directly dependent on the risk of you getting in a car accident. Minimize the risk to reduce your auto insurance bill.

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