How Are Car Insurance Costs Determined?

Anyone who has shopped for car insurance has undoubtedly learned that rates can vary significantly from one insurance company to the next and that even the most minor life change can affect your insurance rates. Insurance companies use many factors to determine someone’s car insurance rates. During the underwriting process, they consider factors like a driver’s age, gender, location, and more. Don’t worry — you aren’t stuck with the rate you have now. There are plenty of ways you can reduce your car insurance premiums.

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      How do insurance companies determine insurance premiums?

      When you sign up for an insurance policy, the insurance company goes through a process known as underwriting to help determine your premium. The underwriting process allows companies to determine how much risk they’re assuming with each customer.

      According to the Alabama Department of Insurance, the car insurance underwriting process starts by learning more about the driver. Through a series of questions, the insurance company determines how likely you are to file a claim. Some factors, such as their driving record and credit score, are based on the driver’s behavior. Others are completely outside of their control, like the driver’s age.

      [ More: The Car Insurance Minimum Requirement in Your State ]

      In addition to determining how likely you are to file a claim, the underwriter also estimates how much you’re likely to cost the company if and when you do file a claim. Insurance companies want to be profitable, so knowing how much money a driver is likely to cost helps companies decide the premium to charge.

      Based on the underwriting process, the insurance company assigns each driver a rating based on how much it believes a future claim would cost. The most important factor in a driver’s rating is their claim frequency, but other characteristics also play an important role.

      The factors that affect insurance premiums

      Throughout the underwriting and rating process, insurance companies look at a variety of characteristics to help decide how much risk they’ll assume and how large of a premium to charge a particular driver. The characteristics they use are backed by data, as certain demographics have been found to be more likely to file insurance claims.

      • Age: You may have noticed that as you’ve gotten older, your car insurance premiums have gradually gone down. Young drivers are often more likely to have car accidents, and file an insurance claim. As a result, insurers tend to charge higher premiums to higher-risk drivers.
      • Gender: Data shows that women are less likely to have any sort of serious driving incident, ranging from accidents to DUIs. As a result, women drivers often enjoy lower insurance premiums than male drivers who share similar characteristics.
      • Marital status: Married individuals tend to file insurance claims at a lower frequency than their unmarried counterparts. As a result, drivers often see their insurance premiums go down after they get married.
      • Location: Depending on where you live, your insurance company may deem you to be more or less likely to file an insurance claim. People who live in areas with high crime rates, high rates of accidents or a high rate of uninsured drivers may pay high insurance premiums.
      • Driving record: It won’t surprise you to know that your driving record is a huge factor in determining your auto insurance premiums. Drivers with accidents, traffic violations or multiple claims on their record are likely to pay higher rates.
      • Vehicle type: Your insurance company might charge you a higher insurance rate if it believes that your car would be more expensive to repair or replace in an accident or if it determines that you’re more likely to be the victim of theft because of your car’s make, model or aftermarket parts.
      • Credit score: Data has shown that drivers with poor credit are more likely to file an auto insurance claim. As a result, drivers with higher credit scores are likely to enjoy lower car insurance rates.
      • Driving frequency: The more you drive your car, the more likely you are to end up needing to file an insurance claim. When you sign up for insurance, your provider will ask how many miles you drive per year or what you use your car for. Limited vehicle use may result in lower car insurance premiums.
      • Insurance coverage: Your car insurance rates are directly impacted by the type of policy you choose. The more coverage you want, the more you’ll pay. Additionally, a higher insurance deductible can result in lower insurance premiums.

      [ Read: What’s the Average Cost of Car Insurance in the U.S.? ]

      How to get lower car insurance premiums

      Shop for quotes

      Before you sign up for an insurance policy, insurance companies can offer you an insurance quote based on information such as your location, age, gender, and vehicle type. Fortunately, this allows drivers to compare rates from many different insurance companies before committing to one.

      Keep in mind that your initial quote won’t necessarily be the insurance premium you pay. Insurance companies come up with these quotes based on limited information. It’s not until they run a credit check and review your full driving record that they’ll give you a final rate.

      Try pay-per-mile programs

      As we mentioned earlier, insurance companies consider your driving frequency to help determine your auto insurance rates. Some companies take that one step further by offering pay-per-mile car insurance.

      Pay-per-mile insurance policies are well-suited for people who drive on a limited basis. Rather than paying the same rate no matter how often you drive, this type of mile allows you to pay only based on the number of miles you actually drive.

      People who might benefit from this type of policy include:

      • People who work from home
      • People who primarily take mass transit
      • People who have a second vehicle they don’t often use

      Go claim-free

      One of the factors most likely to increase your car insurance rates is a claim on your record. Once you file a claim, you’ve cost your insurance company money. Not only that, but your insurer will see you as more likely to file another claim in the future. As a result, your rates will increase.

      Obviously, some incidents are unavoidable. If you’re in a car accident that someone else causes or the victim of theft, there may be little you could have done to prevent it. But even then, it’s worth considering whether filing a claim is the right choice. If the amount of damage you’ve sustained is less than your deductible, you might be better off not filing the claim.

      Compare Affordable Auto Insurance Rates

      Save money on auto coverage with our simple comparison tool.

      Matching you with providers.
      We found results in
      Click at least 2-3 companies to find the very best rate.

        Take advantage of discounts

        Most car insurance companies offer discounts to help customers get cheaper car insurance coverage. Take advantage of as many discounts as possible to help lower your rates. Common discounts include:

        • Vehicle safety features
        • Bundling policies with the same company
        • Incident-free driving record
        • Good student
        • Pay-in-full

        Switch car insurance 

        You don’t have to stick with the first car insurance company you sign up with. In fact, it’s good practice to shop around for rates on a regular basis.

        Auto insurance rates are always changing. And as your personal characteristics change, it’s worth shopping around for auto insurance quotes to make sure your insurer still offers the best rate. If they don’t, you can switch to one that can offer a lower premium.

        [ More: How to Switch Car Insurance Companies ]

        We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

        Reviewed by

        • Courtney Mihocik
          Courtney Mihocik
          Loans Editor

          Courtney Mihocik is an editor at The Simple Dollar who specializes in personal loans, student loans, auto loans, and debt consolidation loans. She is a former writer and contributing editor to Interest.com, PersonalLoans.org, and elsewhere.