How Are Car Insurance Premiums Calculated?

By Desiree Baughman
Desiree maintains insurance licensure in 46 states, and by combining years of experience as a writer and insurance professional, she delivers information consumers can easily relate to and understand. A graduate of Sweet Briar College with a diverse writing portfolio, she regularly serves as an expert source and commentator for respected outlets like CBS Money, Bankrate, and Ragan.com.

How Are Car Insurance Premiums Calculated?

At some point you’ve likely compared auto insurance premiums with someone else. You compare cars, number of accidents and violations, coverage options, age and more, yet you still can’t figure out why you pay drastically different amounts. The numerous and varied factors used to calculate insurance premiums make it difficult to compare your price to someone else’s or pinpoint the specific factors influencing your rates. Premiums sometimes seem to be as unique as the individuals they’re established for.

The average American pays $797 annually for auto insurance. This average cost fluctuates, but the method insurers utilize to calculate premiums largely remains the same. Insurers analyze and combine the relevant factors to arrive at an “insurance score” for each policyholder, which is roughly comparable to a credit score. Credit scores are based on factors like payment history, debt levels, and debt utilization ratios. A higher credit score means you are a more attractive borrower. Similarly, an insurance score is a proxy for your insurability and the level of risk you represent. Insurance scores are based on the following factors:

Current and Past Driving Records

Previous accidents and traffic violations have a big effect on premiums. Moving violations are more damaging to your score than non-moving violations such as having expired tags. Being involved in multiple accidents can raise your rates even if you were not at fault. At a certain point, you really start to look like a bad luck magnet and your rates will go up.

Where You Reside

Your city and state will both affect your car insurance rates. Those living in areas where insurance claims are historically high face higher premiums, even if they’ve gone 20 years without one accident or violation. For example, New York has high car insurance rates because in New York risks like heavy, frequent traffic and auto theft are plentiful. If you live somewhere a little less crowded, or in a suburban or rural area, you’ll probably pay less than in a large metropolis.

Your address affects premiums too. If you live in a single family home with a garage, insurers feel your car is better protected and thus safer than if you live in an apartment building in a downtown area where off-street parking isn’t available.

Age

It’s no secret that age plays a large part in auto insurance premiums. Statistically, young drivers are more likely to have accidents and receive traffic citations, especially those between the ages of 16 to 19. During the period from about age 25 to 70, premiums tend to drop, and those between the ages of 40 and 50 usually see the best rates. Around age 70, premiums begin rising again, partly due to the risks associated with poor vision, slowed cognitive function, medication use and more.

Credit

Credit is used when calculating car insurance premiums because insurers believe there’s a strong link between credit and risk. A University of Texas report explained the relationship simply: the lower a policyholder’s credit score is, the more likely it is that they will suffer an auto insurance loss. Furthermore, the relationship seems to be fairly strong; the UT study stated that an even lower credit score is predictive of even higher expected losses.

Whereas only a handful of insurers used credit as an underwriting factor two decades ago, 90 percent do now. So just how much could credit history impact premiums? Possibly a lot, depending on where you live. An auto insurance rate report by Nevada says that a 30 year old woman with a squeaky-clean driving record could see her premiums increase approximately 70 percent if her credit went from average to neutral. In a worst-case scenario, premiums could more than double due to bad credit.

Gender

Men have actually been paying more for auto insurance than women for decades–approximately $15K more over a man’s lifetime. Why? Many feel that gender shouldn’t be a factor in setting premiums, but the numbers reveal the uncomfortable truth: between 2000 and 2009, men were involved in 18 million more accidents than women. Men also receive more moving violations than their feminine counterparts, drive more often, and are more likely to be involved in fatal accidents.

Vehicle

The age, type and features of a vehicle will all influence your car insurance rates. For example, sports car insurance premiums are higher than those for station wagons. If you drive a newer vehicle, higher premiums are to be expected because it will cost more to repair or replace the car if it suffers damage or gets totaled. But newer vehicles often have safety features such as anti-lock brakes and airbags which qualify you for discounts. You can also install an anti-theft system in your car to earn another discount, if it doesn’t already have one. Finally, driving a car for which there is a ready and large supply of after-market parts (identical parts which aren’t made by the original manufacturer) may result in lower premiums.

Vehicle Use

When quoting your policy, an insurer will ask how a vehicle is generally used. Do you drive it back and forth to work or school every day? Do you work from home, only using it to run occasional errands? Is it a sports car that you rarely take out of the garage and only drive on weekends for pleasure? Cars insured as a ‘commute’ vehicle usually carry higher premiums than ‘pleasure’ vehicles because commute vehicles are on the road more, and more road time means more opportunities to suffer a loss.

Additionally, if your car is a commute vehicle, the insurer may ask you how far your commute is, how many days a week you use the vehicle, what time of day you commute, etc. All of those questions are designed to assess risk-exposure. Time of day can be a particularly influential factor because the chance of fatal accidents is greatly higher at night for drivers of all ages. 

Continuous Insurance Coverage

Unfortunately, many drivers don’t learn the importance of carrying continuous insurance coverage without any gaps–even just for a day–until it’s too late.Just a tiny lapse in coverage can greatly increase rates (they could possibly triple). If you drive but don’t own a vehicle, consider a ‘Named Non-Owner’s policy’. This is coverage which follows you in any vehicle you drive, and allows you to maintain continuous coverage in the insurers’ eyes.

Insurer’s Data and Claims History

One factor in rate determination which isn’t influenced by the risk profile of the particular policyholder is the insurer’s own claims history, and also the formula they determine rates with. There is no universal car insurance premium calculator out there soberly weighing the factors according to some fixed formula. In fact, no two insurers use the same calculation to determine premiums.