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How Insurers Determine Your Auto Insurance Premium

By Annmarie Geddes Baribeau

When it comes to purchasing auto insurance, knowing the factors that influence premium can help you get the best coverage at a competitive price.

Most states generally require owners of vehicles to purchase coverage. By paying premium on an automobile insurance policy, you relying on an insurance company to cover the costs, minus the deductible, should you or your vehicle be involved in an accident. Automobile insurance can also cover damages to your car from exposures including theft, weather and vandalism.

To be competitive, insurers charge the most reasonable premium possible to attract and keep customers while assuring they can pay future claim costs.

When shopping around, you might notice insurers charge different premiums for the same coverage. These quotes reflect how each insurer uses its own “secret sauce” to determine the potential riskiness of a policyholder and his or her covered vehicle(s).

For insurers, all secret sauces are based on a proprietary blend of statistics, other data and assumptions. To predict the likelihood and seriousness of potential claims, insurers vary on both the factors they use and how much emphasize to give them.

These factors are:

1. Your driving record and experience

Driving records are obvious indicators of potential risk and are generally given greater emphasis than other factors.

Your driving record is a history of violations, convictions and collisions. The fewer violations, the lower the premium. Your record also indicates a lack of experience. Since new and inexperienced drivers are more likely to be in an accident, coverage costs more. The good news is that insurers honor records that improve over time.

2. Your age

People younger than 25 years old are considered inexperienced drivers with a greater accident potential. For some insurers, the age factor is about the same for the 26 to 65 age range. Since senior citizens tend to have more accidents, their rates tend to be higher.

3. Your gender

Insurers see inexperienced and younger male drivers as a greater risk than their female counterparts. While the distinction for younger drivers is shrinking, it is still significant. For experienced drivers, female drivers are also considered less risky, but insurers do not see gender differences as significant.

4. Your station in life

Statistics show that married drivers are less likely to crash than those who are single. Mothers are also considered to be safer drivers. Singles can improve their premiums with a fantastic individual driving record.

5. How much you drive

Insurance is based on the concept of exposure. That is, the more you drive, the more likely you will be in a car accident. So if you drive your car “to work,” which insurers generally define as driving more than 15,000 miles a year, you pay more for greater exposure to potential car accidents. When driving for “pleasure use,” which generally less than 15,000 miles annually, premium should be lower.

Drivers in highly populated areas have higher auto insurance premiums due to greater traffic exposure. That’s why urban drivers pay a higher auto insurance price than those in small towns or rural areas.

Insurers also know that most accidents occur within a couple miles of places where people drive frequently. That includes your home and places you run errands, such as shopping malls and grocery stores. What insurers do not know is how often you make these trips.

That’s where telematics come in. For drivers who agree to have special equipment installed in their car, insurers can monitor how many short trips are being made and other driving behavior. Insurers including Progressive and State Farm are offering “usage based” programs that give good drivers up to double-digit percentage reductions of their auto insurance bills.

6. Location. Location. Location.

Where you park your car is also telling of potential auto insurance claims. By definition, the less criminal activity, the safer the neighborhood and the less likely you will file a claim for vandalism or theft. ZIP codes can be another factor, though some insurers are “clustering” locations with similar risk in different cities.

Besides where you drive and park your car, insurers also look at the actual cost for covering claims in your area. Medical and car repair bills can cost more in some locations. Areas that are heavily litigious, known for a greater prevalence of insurance fraud and are vulnerable to extreme weather can also impact potential costs.

7. Gaps in insurance coverage

Most auto insurers consider drivers with gaps in their auto insurance coverage as potentially riskier to insure than drivers who have consistently maintained coverage.

8. Your credit score

Research shows there is a correlation between credit characteristics, as reflected in credit-based insurance scores, and insurance losses. Statistically, people who have a poor insurance credit score are more likely to file a claim.

Most insurers are using credit-based insurance scores as a factor in determining the risk of policyholders. These scores are based on information including: payment history, bankruptcies, collections, outstanding debt, length of credit history, new credit and credit risk. Regular, on-time credit card and mortgage payments affect a score positively, while late payments affect a score negatively.

9. Your vehicle(s)

Basically, the more it costs to repair or replace your car, the higher the premiums. Fully loaded sports cars, for example, are more likely to get stolen. Common family cars can also be targets to thieves who want to sell parts.

Vehicles that have favorable crash safety test scores are likely to cost less to insure. Engine sizes, even among the same makes and models, can also impact insurance premiums.

If you are driving an old car or junker that will not require replacement, you can opt out of comprehensive and collision coverage for it. If you do, however, replacement costs will be your responsibility.

10. Other Coverage You Purchase

Most insurers provide discounts if you also purchase other types insurance from them. Typically, this includes umbrella, homeowners or renters coverage.

11. Your coverage and deductible.

Of course, the more insurance you buy, the more it costs. To reduce premiums, you can offer to share the cost per claim by agreeing to a deductible. The higher the deductible, the more you save in premiums.

Just determine how much money you can afford to pay when filing a claim – generally $500 or $1,000 – and your insurer will adjust your premium accordingly. Also be sure if you need add-ons such as vehicle rental coverage. If your family can get by with a second car or you are a member of organizations like AAA, you may not need it.

Conclusion

When you think about it, the factors that insurers consider are common sense and/or statistically proven to predict the likelihood and cost of potential claims. The factors you can control, such as having a stellar driving record, maintaining coverage and responsibly paying your bills are some of the best ways to keep your car insurance costs at bay.