How Car Insurance Rates Are Calculated?

Lower rates would be great especially when you can achieve them while keeping good policy coverage from a reliable insurer. First step is to understand how and why you would be given discounts. Have a look at how premiums are calculated paying attention to the fact that they will differ depending on the company offering them.

Car insurance rates, as well as similar risk management products such as health care coverage, are calculated as precisely as possible to the actual circumstances of each and every policyholder. In effect, no two policies are exactly alike, inasmuch as no two fingerprints of two individuals are alike.

Actual auto insurance premiums are computed by an army of mathematicians and statisticians, who weigh the financial risks an individual policyholder poses for the insurer. In other words, insurance rates reflect the assessment of the insurance company whether or not they are likely to pay for covering a particular driver.

Automated computation of car insurance rates

In the old days before computers, insurers relied on pre-computed insurance rate tables to calculate the premiums they will charge for each policy applicant. Since the mathematics behind tended to be complicated, they could only assess a few variables in computing rates.

Nowadays, premiums are calculated by supercomputers that can handle or factor in tens of variables (representing the characteristics of the applicant). After feeding this information to the machine, it turns out an assessment almost immediately in the form of auto insurance quotes.

So what are some of these factors that figure in the computation?

Car-dependent variables

Car-dependent factors are an assessment of risk factors inherent in the vehicle as it stands. These factors include: how a car was manufactured, what are its safety features, and of course, the actual value of the vehicle.

  1. Safety record of the vehicle or car model

Insurance companies may rely on the safety rating of a car (which is assigned by a duly recognized third-party industry body or state authorities) to compute the price of their policies. The higher the safety rating of a car, the less insurers would charge.

  1. Market value of car

The more expensive a car, the higher are the insurance rates. Luxury vehicles are of course the most expensive to insure, while minivans and sedans tend to get the cheapest car insurance rates. Also, aftermarket additions (e.g. sound system, custom parts, electronics) will increase the car’s value, and therefore the insurance rate. However, installing a security feature on the car can cut down rates.

  1. Mileage of the car

The more frequently or the longer a car is driven during an average period, the higher are the premiums. Some companies even offer discounted insurance policies for vehicles not driven for a certain number of miles.

Driver-dependent variables

These are risk factors attributed to the behavior of the driver:

  1. Driving history

A poor driving history (being involved in an accident, DUI, etc.) will mean higher premiums. Conversely, a long history of safe driving will net cheaper car insurance quotes.

  1. Age and civil status

Actuarial studies (insurance statistics and math) show that young people, especially men, tend to be reckless. Therefore they tend to pay more for insurance. Also, married people are likely to make fewer claims, so they could get cheaper premiums.

Location-dependent factors

Other factors that could affect car insurance rates are the crime rate at the community, likelihood of extreme weather events in an area, or if the vehicle is sheltered or parked in a driveway. They is why most quote process start with a zip code entry to determine the location.

Computing auto insurance rates have become so complex, there are even methods that look at the driver’s educational, occupational, and credit backgrounds. These factors relating to applicant financial standing and bacground is becoming more and more important. However, the most important aspect is still the applicant’s driving history – safe drivers can still get the cheapest car insurance rates.

Leave a Reply