How Are Car Insurance Costs Determined? | The Simple Dollar

How Are Car Insurance Costs Determined? | The Simple Dollar

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.

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:

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.

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:

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 ]

Too long, didn’t read?

Car insurance premiums depend on a variety of factors, including a driver’s age, driving record, and credit score. No matter your situation, there are steps you can take to lower your insurance rates. By switching car insurance companies or taking advantage of available discounts, you can save money on insurance.

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