How are Auto Insurance Rates Determined?

Auto insurance rates, like all insurance rates, are carefully considered calculations based on statistical probabilities and strict underwriting techniques. Insurers don’t throw random numbers at you in the hope that something sticks and, contrary to what you might think, they don’t charge as much as they think they can get away with.

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In this guide, we’ll look at all the things that go into setting your car insurance premiums, from the ones you’d expect to the ones you definitely wouldn’t.

This is how auto insurance rates are determined.

Age

Your age is one of the biggest factors in determining your auto insurance rates. Car insurance companies have a wealth of data concerning the ages you are most likely and least likely to be involved in an accident.

A 16-year-old driver is three to four times more likely to crash than a driver in their early 20s. That’s a difference of just four years, but in the eyes of the insurer, it’s the difference between a high-risk driver and a moderate-risk driver.

In fact, the risk is so disproportionately great for 16- and 17-year olds that they are nearly twice as likely to be involved in an accident than 18- and 19-year olds. They are also more likely to get speeding tickets and receive violations for racing and reckless driving.

We’ve all been there. If you weren’t that reckless kid who wanted to put the pedal to the metal and impress your friends, you knew someone who was. Thankfully, most drivers mature very quickly, the risk plummets, and insurers are able to reward them with lower rates.

Gender

Young men are more dangerous than young women behind the wheel. One of the highest risk demographics is a 16-year old male driver. By virtue of their age and their gender alone, their insurance quotes will likely be higher than at any other point in their life, even if they later make a claim for an at-fault accident or get convicted of a DUI.

It seems unfair, especially if you consider yourself to be a responsible, careful, young male driver, but insurers aren’t interested in promises. They focus purely on the statistics and for teenage boys, those statistics don’t look good.

Young female drivers are still considered to be a greater risk than older females, but they can expect to pay less than males on average.

There are a few caveats here that need to be addressed.

Firstly, while young men are charged more than young women, the same can’t be said for older drivers. In older drivers, the accident rate is higher in women than it is in men and some insurance quotes will reflect this.

Secondly, a handful of states have outlawed the practice of discriminating based on gender. These states include Massachusetts, California, Michigan, Montana, Hawaii, Pennsylvania, and North Carolina.

Homeowner and Marital Status

Married drivers are safer than single drivers. It seems like a strange statement to make as there is no direct and obvious reason, and what’s even stranger is that the difference is considerable.

In one study, researchers found that single drivers were twice as likely to be involved in a car accident when all other parameters were accounted for. In other words, a 25-year-old driver with a clean driving history is twice as likely to crash than a 25-year old married driver with the same driving history.

You could pay as much as 15% less on your auto insurance premiums just because you tied the knot!

While there is no obvious reasoning behind this, it seems plausible to suggest that married drivers are safer because they have more responsibility and more to lose. Getting married also requires making a very big commitment, and such commitments are more likely to be made by people who are responsible and grounded.

Of course, that’s not to say that you’re irresponsible if you’re not married or that you’re responsible if you are. We’re talking about averages.

By the same token, homeowners can secure lower premiums than renters. Not only are they deemed a lower risk, but they are also a better prospect to the insurer, as they have more money, are more financially responsible, and can purchase a homeowners insurance policy along with their car insurance policy.

In this sense, a homeowner can save money in two ways, making homeowner status one of the biggest determining factors in acquiring cheap car insurance.

Location

Car insurance quotes differ considerably from state to state. Drivers in rural areas may pay less than those in built-up areas, but that’s not always the case.

Underwriters will look at the level of car crime (theft, vandalism) and car accidents in your area, before using this information to set your rates. Weather and animal collisions will also be considered.

Credit History

Credit scores are checked in most states and higher premiums are charged to drivers with bad credit and no credit as there is a higher chance (statistically speaking) they will make an insurance claim.

Your credit score is an essential component of your financial life, something you need to nurture carefully and check at least once a year. 

35% of your credit score is based on your payment history, and there is no quick and easy way to improve it. The same applies to the smaller parts of your score that are based on account age. The only way to improve these aspects of your score is to keep making payments, avoid too many applications and new accounts, and prioritize all debt payments.

30% of your score is based on your credit utilization ratio and this can be changed following a few simple improvements. Credit utilization looks at your total available credit (credit limits) and your total used credit (debt). By increasing your limits and paying off as much debt as possible, you can improve this aspect of your score.

Claims History

Insurance companies will check your claims history before setting your premiums and may charge you more if you have any at-fault claims in your recent history.

It’s a different story if you have comprehensive claims and accidents that weren’t your fault, but generally, the more you cost your current insurers and previous insurers, the higher your premiums will be.

Driving Record

Your driving history is one of the biggest things affecting your car insurance rates. The more moving violations you have on your record, the more likely you are to be hit with high rates.

Even a speeding ticket can increase your rates by between 15% and 30%, while DUI/DWI convictions and reckless driving/racing charges could bump your costs by as much as 70%.

Type of Vehicle

One of the biggest mistakes that young drivers make is to purchase a flash, fast car that looks great but is far from practical. No 16-year-old boy dreams of buying a used Honda; they want sports cars, luxury cars, something they can show off to their friends.

Underwriters look at the likelihood of the vehicle being stolen (based on national and local statistics) and account for anti-theft devices, safety features, and the cost of repairs. The fewer features it has and the harder it is to find affordable and suitable parts, the higher your auto insurance quotes will be.

Instead, look for a vehicle that is a few years old but has a high safety rating, lots of safety features (front and side airbags, anti-lock brakes) and is not targeted by thieves. The difference between some luxury German cars compared to cheaper Honda and Toyota cars can be over 200%.

Mileage

How much you drive isn’t as important as you would expect. The difference between a driver who does 5,000 miles a year and one who does 15,000 is often just a couple of percent. It doesn’t make much sense at first, because surely the driver who does 15,000 miles is three times as likely to be involved in an accident as one who does 5,000.

But, as always, it comes down to statistics. 

Statistically speaking, the more miles you do, the more experienced you are, and this experience pays off. People who limit their driving to just a few thousand miles may do so because they don’t like driving in the dark or refuse to drive too far from their homes or on busy roads. They may not be confident behind the wheel.

Of course, that only applies to a small percentage of them, but that’s enough to skew the statistics and to balance things out. 

Lower mileage drivers will still be quoted less, but because of these factors, the difference won’t be as impressive as you might have thought.

Driving habits are just as important, with the underwriters looking at where you do those miles, how busy the roads are, what time you drive, and how common car accidents are in that area.

Bottom Line: You Won’t Always Pay More

In all of the above cases, we looked at risk and how it can impact car insurance rates. However, you won’t always receive higher insurance rates based on some of the factors we discussed. You will certainly be deemed a higher risk, but many states don’t allow insurers to discriminate in some of these areas.

As noted above, in some states, California included, it is illegal for insurance companies to charge higher rates based on gender. Make sure you check with your local authorities and insurance providers to better understand what is and isn’t considered when determining your auto insurance rates.