To most consumers insurance premiums and how they are calculated are a mystery — perhaps just as elusive as understanding the declarations page of an insurance policy. Some people may feel as though insurance companies pull a random number out of the air based on the color of a car or how many speeding tickets someone’s had, but there are actually several factors used when determining premium.
While the average consumer may never need to calculate risk themselves, they should definitely know what factors are considered. Once all of these risk factors are combined, they create a profile of the risk you present as an insured. Insurance companies generate a consumer premium based on an individual’s risk profile.
According to The Insurance Information Institute, most Americans pay on average $795 a year on car insurance. The averages generally change from one year to the next. The rates are driven by inflation, the company’s financial standing, past loss, anticipated loss, and more, but the main factors used pretty much remain the same.
Your Driving Habits
It’s no surprise your driving record plays such a large role in your premium. Moving violations and the number of accidents you’ve had carry weight when calculating the premium.
Not only are the number of at-fault accidents considered, but so are accidents in which the other driver was at fault, as well as claims where comprehensive coverage paid out. For the most part, it is true that a comprehensive claim doesn’t really affect your premium much — but it does matter just a bit. This is especially true if you’ve had a lot of comprehensive claims or not at fault accidents. In fact, some insurance companies even have rules when calculating premium about the number of comprehensive claims or non-fault accidents you’ve had. For example, an insurance company may rate three not at-fault accidents the same as they would one at-fault accident.
“If you’re a magnet for car accidents, and seem to have frequent bad luck, insurance companies are going to see you as potential financial loss — regardless of whether they have to pay out under collision or comprehensive,” says Rachel Mullins, an insurance agent with over fifteen years of experience. “It’s still money they may be out, thus they’re going to try and recoup that loss by charging more in premium.”
How much you drive your car is considered as well. How far you drive to work, pleasure use only, and how many miles you drive on average can play a part in premium. Insurers also want to know where you park your car, as this affects its likelihood of being damaged. If you only have on-street parking, you’d likely see a larger premium than if you lived in a rural area or had a private garage.
Your Age and the Ages of Listed Drivers On Your Policy
Most insured drivers are aware of this factor. Insurance companies have always stood by the fact that statistically, younger drivers are more likely to have an accident. This is especially true for drivers in the age bracket of 16 to 19, according to The Insurance Information Institute. The older you get, the less weight age carries.
Not only is the primary insured driver’s age taken into consideration, but so are the ages of any listed drivers on a policy. That’s why so many parents cringe at the thought of adding a sixteen year old driver to their policy.
Also, most states have laws that define ‘youthful drivers’. In Virginia for example, a female is considered a youthful driver until either the age of 25 or until married, and whereas men are considered youthful drivers until the age of 30 or until married.
“It’s true age is a large factor in determining premium, but it is possible to offset this cost by keeping a good driving record, continuous insurance coverage, and having a minimal claims history,” explained Mullins.
Where You Live and Drive
All one has to do is take a look at the difference in premiums between North Carolina and New York to see that where you live is factored into premiums. There are a lot of independent factors that go into the way a state or particular area is rated. For example, those who live in New Jersey tend to see high insurance premiums because so many people commute to New York for work. This means several things: more time on the road, driving in a congested area, higher potential for claims due to theft and vandalism, in addition to the likelihood of an accident. Your local area can play a part, too, such as whether you live in a suburban area, the size of the population, and even whether you live in a county or a city.
The home you live in is also sometimes considered. For example, if you live in a single family home with a garage, insurance companies assume your car is better protected than if you live in an apartment in the city where no off-street parking is available.
In addition to those factors, insurance companies also look at things such as the average amount of a claim in the state, weather, crime statistics, and the rate of insurance fraud in the state.
The Car You Drive
Since many people assume that most of their insurance premium is determined based on what kind of car they drive, many aren’t surprised to see a change in rates if they trade in their vehicle.
However, just because you drive a newer car doesn’t mean you’ll pay more than you did on an older model. In fact, this can mean the complete opposite.
“There are a couple ways of looking at this. Insurance companies consider one thing first and foremost when it comes to the make, model, and year of the vehicle to insure, and that’s how much it would cost to replace or repair that vehicle,” Mullins explained. “The part that most people don’t realize though is that it may cost more to replace an older vehicle than a newer one, even if it’s a different make and isn’t a make considered ‘expensive.’ For example, you may trade a 2000 Chevrolet Cavalier with all the bells and whistles and a sports package for a 2001 Honda Accord. Many would assume the Accord would cost more to insure since it’s newer and probably more expensive. However, the Accord may be less to insure because of factors like availability of parts and price of repairing if damaged.”
Additionally, most insurers offer discounts for safety features like airbags, anti-lock brakes, and alarms, especially if your alarm disables the vehicle if someone tried to steal it.
Occupation
Insurance companies aren’t just being nosy when they ask what you do for a living. As it turns out, it’s actually a factor in your insurance premium.
If you work far from home or if you use your car for business purposes, this can increase the premium. Many companies are very strict when it comes to insuring people who use their car for jobs like pizza delivery, since the car would be used during the entire job, versus a teacher who simply commutes back and forth.
“Insurance companies want to know what you do with your vehicle, whether you’re driving it two miles to work everyday or if you’re delivering pizzas or flowers,” Mullins says. She also says if you use your vehicle at all for commercial purposes, such as realtors, then a commercial auto policy should be bought in order to avoid denial of a claim.
“Your occupation title alone tells a lot about how you possibly use your vehicle, and this is something that affects your potential for risk, which is what insurance companies are trying to figure out,” Mullins explains.
Your Insurance History
Few people realize it, but not only is it a good idea to keep continuous insurance coverage for your protection, but it’s also a good idea for the sake of your bank account. This means never having a lapse in coverage — no matter what.
Having even a two or three day lapse in insurance coverage can increase your rates, sometimes as much as two or three times, and keeping continuous coverage can earn you discounts. In addition to being required by most states, having continuous coverage is also considered a sign of being a responsible driver by insurance companies, resulting in possible discounts. Not only is it a “behind the scenes” discount, quietly factored in along with other components, but it’s also something that can earn you discounts over a long period of time, such as a ‘Long term customer’ discount if you remain insured with the same company for an extended period of time.
No car to insure? No problem — you can still carry coverage. In addition to being listed as a driver on a household member’s insurance policy, you can also buy what’s sometimes called a named non-owner policy. This is a liability only policy that follows drivers to whatever vehicle they’re driving. With these options, there’s no reason to ever go without some kind of auto insurance coverage.
Additionally, having even a short lapse in coverage can potentially cause you to be rated as “non-standard.” Non-standard policies cost a lot more than standard policies, and typically drivers who have less than desirable driving records, low credit ratings, or many claims have to carry a non-standard policy until they’re eligible for standard policies again. With some companies, having just a day or two lapse in coverage can cause a driver to be classified as non-standard. Sometimes drivers even have to carry a non-standard policy for a minimum of six months before they’re eligible for standard rates again.
Your Insurance Score
Insurance scores are perhaps the most misunderstood factor. Though its use is still disputed by those in the industry, as well as by consumers, an insurance score is similar to a credit score, although instead of being a number that rates financial responsibility, it rates risk.
Although practically all insurance companies have kept their insurance score formulas a secret, they’re all basically comprised of what your credit score is. A few of the things considered include:
- the number of outstanding debts
- the amount of any outstanding debts
- delinquency of any debts, including the amount delinquent and for how long.
According to Mullins, “Insurers then take your insurance score and the other factors like age, insurance history, and driving history and determine premium. How they use each one in their formulas is basically a trade secret, although we do know what is considered and what we can do as insured drivers to keep costs down.”
-Desiree Baughman, InsuranceQuotes.org, @DesireeDB
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