How Auto Insurance Premiums Are Calculated

The AAA (American Automobile Association) released its annual “Your Driving Costs” brochure which states that a low-risk driver with no driving record can pay $1001 a year in premiums in 2012 for a sedan.  But is that a fair price?

A new survey released by the Consumer Federation of American would say otherwise. The survey revealed that most good drivers that have no accidents or violations and that lived in moderate income areas in 15 different cities were paying too much for their car insurance. Why? Because of the minimum liability coverage required by those particular states.

More than half (56%) of the rates that were quoted to two typical moderate-income drivers were well over the $1000 mark, with one third (32%) of those quotes exceeding $1500.

To make matters even more confusing, in some cities, the quotes that people received could vary from around $800 to well over $3000.

The Insurance Information Institute says the wide range of quotes are all about competition.

“In addition, the experience of the insurers in these markets will differ, leading insurers to price the risk of a prospective policyholder differently,” said economist and Institute president Dr Robert Hartwig.

However, the Consumer Federation of America disagrees with the study, and says there shouldn’t be so many variations in the quotes.

Stephen Brobeck, the CFA Executive Director stated, “Insurers say rates reflect risk and cost, but if this is in fact the case, why do their assessments of these factors differ so radically?”

What factors count towards someone’s auto insurance rates?

  1. Age.
    • This is a big factor when you are under the age of 26. For males especially, you will pay higher premiums if you are a teenager or early twenties.
    • This can be offset a little if you are a full-time student and have a GPA of 3.0 or higher or if you have completed any driver training or accident prevention courses.
    • In some states, drivers over the age of 70 may pay a little higher premium due to the increase in driving risk after a certain age.
  2. Marital status.
    • If you are married, you will receive a married discount. In addition, if both you and your spouse own a vehicle, you will have multi-car discounts that can provide as much as a 20% savings.
    • The down side to this is if you have a spouse with a not-so-perfect driving record.
    • However, you can still pay less if you are together than if you paid separately. If you are the one with the good driving history, it will provide your spouse better rates for being on your policy.
  3. Where you live.
  • If you live in an urban area, you will probably pay more than someone living in a rural area.
  • There is more potential for accidents because of greater exposure to other vehicles, and your region will likely have more claims than a rural area.

Using these factors to determine insurance scores

Insurers then use this data as well as other factors to develop formulas, developing an individual’s ‘insurance score’ which determines premium.  An insurance score is often misperceived as being similar to a credit score, when in fact, it’s completely different and is based on many factors like the ones above. The insurance score is a cumulative reflection of all those factors and tells insurers what a policyholder’s premium should be.

These particular factors are compared to history and statistics. For example, if a large amount of people live in an area where insurance claims are high, then someone who lives in that area will likely face higher premiums, even if they’ve been driving 20 years without any accidents or violations.

Even if you think a factor affecting your insurance score will greatly affect your premium, you should always be truthful when providing information and start working to repair any factors that may be harming your rates.

If you’re not honest, you could avoid being prosecuted for insurance fraud or rate evasion as insurance companies have many ways of verifying the accuracy of your information through reporting agencies and credit agencies. The more accurate information provided, the more accurate quotes you’ll receive and the better chance you have of finding which insurers truly are the best options for you. Some customers buy a policy without being truthful about something and think they’ve succeeded, but by the time the policy makes its to underwriting, the policy can be cancelled or increase significantly. A cancelled policy could put you in a worse position.

The best way to keep premiums down is to maintain insurance coverage and keep your driving record clean. Even if you lie by ‘omission’ or if the insurer doesn’t see anything wrong right away, it will eventually get caught—whether it’s years later or a month later, and most of all, insurance fraud is much more expensive than any insurance policy you’ll ever buy.

 

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