Understanding Auto Insurance Rates

How car insurance rates are set

Car insurers provide protection to drivers against vehicle-related losses by agreeing to compensate the insured for losses in exchange for regular payment of a relatively small consideration, called premiums, by the insured. Car insurance rates, or premiums, are calculated based on complex mathematical models capturing many different factors. Each insurance company has a different model, but most use a similar set of key factors to quantify the risk of vehicle-related damage, injury or loss for specific types of drivers.

Insurance companies attempt to set premiums in a way that on average they cover expected future claims and generate a profit. Expected future claims are the function of the size of the coverage offered and the probability or risk of a claim from the insured. The factors used by insurance companies for establishing the premium impact or predict one or both of these two .

Coverage options and levels

Coverage options and levels chosen determine the size of the expected payout. Coverage typically pertains to three major categories:

– liability coverage for bodily injury and property damage caused by the insured to others,

– property coverage for damage or loss of the vehicle and

– medical coverage for expenses related to treatment of injuries, funeral costs or lost wages

Liability insurance covers damages caused by the insured driver to others. Liability insurance is mandated by most states for varying coverage levels. Insurance companies calibrate coverage options for three components: maximum amount that can be paid to a single individual, maximum amount for all injuries in a single accident and maximum amount for property damage in one incident.

Property coverage can be limited to collision coverage to cover damages from accidents or comprehensive coverage to pay for damages or loss caused by theft, fire or vandalism. Property coverage is optional, but if the insured vehicle is financed, the financing company will require specific property coverage options.

Medical coverage is also optional, but drivers lacking adequate health insurance could especially benefit from it.

Most states also require coverage for damages and injuries caused by uninsured or underinsured motorists. Although liability insurance is mandatory, in reality many drivers lack adequate liability coverage. The uninsured or underinsured motorist protection covers claims from an accident caused by such a driver.

Insurance companies offer a number of additional, minor coverage options, such as rental car coverage that pays a fixed amount for a car rental while the insured’s car is being repaired and roadside assistance coverage.

The coverage options and levels chosen define the amount of potential claims from the insured and have a major impact on the premium quoted. Deductible choices – amounts that the insured driver commits to pay out-of-pocket before filing a claim with the insurer – do reduce the potential claim size for the insurer and therefore choosing higher deductibles will result in a lower premium

Almost never does an insurance company need to pay the maximum amount of coverage to an insurer. Insurance companies attempt to assess the probability of a particular client’s filing a claim for an insurance event. They use historical data to relate key attributes and characteristics of clients to incident patterns. The analysis of this data determines what attributes they rely on and how they ‘price’ these attributes in their quotes. As insurance companies continuously monitor and adjust their models, there will be changes in their rating policies.

Driver’s personal information

The driver’s gender, age, marital status, occupation and education are all important factors used in assessing risk. Women tend to be viewed as less risky along with more mature, married drivers. Young male drivers are considered higher risk and all else equal, are charged higher premiums. Some companies use the driver’s occupation and level of education as differentiating factors, favoring professionals with higher levels of education.

Driver’s driving and insurance record

The client’s driving and insurance record is the most specific and pertaining predictor of their driving behavior and expected future car insurance claims. A short driving history, a driving history with multiple accidents or moving violations and an insurance history with multiple past claims or significant lapses indicate higher risk and will result in a higher rate.

Driving patterns and vehicle use

The frequency and primary purpose of the use of the insured vehicle and the approximate annual mileage are often important factors in rate setting. More frequent or longer trips increase the risks of accidents, as do regular commutes during peak hour traffic. Drivers who use their vehicles in these ways may be charged slightly higher premiums.

The insured vehicle

The insured vehicle’s performance capability and retail value are two important factors potentially impacting premiums. High performance cars providing greater opportunity for risky driving generally carry higher premiums, a do luxury vehicles with exceptionally high values. Differences in the various vehicle makes’ relative safety features and records can also result in higher or lower premiums based.


The general area where the vehicle is stored and primarily driven can be important, as well. Neighborhoods with higher crime or accident rates tend to be insured at higher premiums. States with significant numbers of uninsured motorists will see an upward pressure on premiums for all drivers.

Driver’s credit rating

Insurers have been using credit ratings to assess drivers’ reliability, financial stability and responsibility. A higher score can result in lower premiums as it is thought to imply responsibility and a more stable financial situation. Some insurance companies may outright deny insurance to clients with poor credit ratings.

Similar factors, different models, different rates

While most insurance companies use very similar factors in setting their rates, they develop their own models to price the impact of these factors into their premiums. The methodologies that they choose and the data that is available to them for develop their rates will result in potential differences on how they view and weight the specific factors.

Other factors such as the size of the company, the markets that they focus on and their marketing strategies can play a significant role. Larger companies that can benefit from economies of scale can afford to charge lower premiums. Similarly, insurers specializing in a specific market niche may have a more sophisticated understanding of that specific sector, allowing them to have more accurate models and potentially lower premiums for clients of certain profiles. Insurance companies also modify their models and pricing on an ongoing basis as new data and statistics become available or as the companies modify their marketing strategies and target new types of clients.

This means that for most clients different insurance companies will offer different rates. Thorough research and comparison shopping can help drivers find and select the most favorably priced car insurance. Customers should be aware of how changes in their profile, such as aging, relocation, changes in marital status, new car purchases impact their options. Most drivers benefit from periodic comparisons of quotes as insurers may modify their rates without significant changes in the client’s profile.

Additional resources:

Car Insurance Rates 101

Car Insurance Guide