How Auto Insurance Rates are Determined

How Auto Insurance Rates are Determined

Purchasing car insurance can be a daunting experience, and it can often be confusing as to why the insurance companies ask the questions they ask. It can feel like they are asking random questions completely unrelated to driving.

But companies use all kinds of information to determine the rates that will be charged to each individual for the insurance provided. And a wide range of factors are considered when evaluating those rates. The questions asked help provide vital information for that evaluation.

Contributing Factors

Some of the information you should be prepared to provide includes:

  • age
  • gender
  • zip code where the vehicle will be garaged (essentially, where do you live and where will the vehicle be stored most the time)
  • your highest educational level
  • marital status
  • your profession
  • any speeding tickets or traffic violations you might have had recently
  • how many miles you drive annually and/or your daily commute
  • the type of vehicle you want to insure

Number Crunching

Insurance companies use professionals called actuaries who use math and statistics to help determine the financial consequences of the risks associated based on the information you provide. Those risks, along with various financial theories, are used to develop your insurance rates. Companies are constantly reviewing their rates and the theories used to develop them to help ensure they’re offering the best rates for consumers. They also strive to make sure they’re getting enough for the company to afford to cover any potential losses.

While it may seem inappropriate for insurers to request some of this information, it is statistically proven that younger drivers (especially younger male drivers) have more accidents and traffic violations than other drivers. As such, it is more costly for companies to insure these individuals, and it is likely the rates for individuals in this bracket will be higher than for others.

One of the interesting questions asked is how many miles you drive annually. Many drivers feel like this answer shouldn’t have any bearing upon their rate, but for the insurance companies it is a legitimate factor. In part, it determines how much exposure you and your vehicle have to other vehicles and to any potential accidents and thus, to any expenditures by the insurance companies.

Your Commute

Many companies break the mileage question down further and instead of asking about annual mileage ask how many miles you drive to work each day. A typical breakdown, as reported by Coverhound, is reflected below.

  • Three miles or less: pleasure driving and not considered when calculating your rate
  • Four to nine miles: first tier surcharge – usually a few extra dollars
  • 10-15 miles: second tier surcharge – up to $5 additional
  • 15-20 miles: third tier surcharge – up to $8 extra per month
  • 20 miles or more: the highest surcharge, which could be an extra $10 per month

Drivers who have a commute of 50 miles should have the same markup as drivers of a 20 mile commute. The $10 per month surcharge is generally accepted as the point where increases cease.

New Insurance Policies

There is a new form of insurance available in some states which allows consumers to pay as they drive. This is based upon the mileage breakdown above but which takes it to a greater extreme. In this plan, drivers agree to install a small device in their vehicles which monitors mileage and driving patterns. It then reports that information to the insurance company to determine rates.

“The way our program is designed, it’s only to reward people for good driving,” Sarah Inciong, director of Allstate’s Drivewise usage-based program, said.

When you are ready to begin the purchase process, consider contacting Obrella and letting one of our licensed agents guide you through the maze of quotes and rates. Obrella can help you compare quotes for you from several different insurance companies and find the best fit and the best rate for you.

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