Understanding How Auto Insurance Rates Are Determined

Auto Insurance RatesHave you ever wondered how auto insurance companies set their rates? You may be surprised to find that, contrary to what most people think, auto insurance rates are not regulated by the state. What is regulated by each state is the method that auto insurance companies use to set their rates.

Your group determines your rates

If auto insurance rates are not regulated by the state, then how do auto insurers determine the premiums they charge? They organize their policyholders into groups based on the information that’s provided when you complete an application as well as information obtained from other sources including your driving record, your credit history and more.

Each insurance company is able to define the criteria for the various groups it creates. Since the criteria differ from one auto insurance company to another, your information might put you into one group at one insurer and a different group at another insurer. That’s why you’re usually quoted widely varying costs for your auto insurance premium even though you request the exact coverage and deductibles from all the insurers you contact.

The desire to make a profit

Another reason for the difference is because different auto insurance companies have different expenses and claims payment needs. Like any business, the goal of an auto insurer is to make a profit so the premiums they charge are designed with that goal in mind.

Again, state law regulates the type of information an auto insurance company is allowed to use to set its rates. Usually it is some combination of:

  • Your personal details including age, gender, area of residence, marital status and the number of years you’ve been driving.
  • Your driving record including the number and type of traffic violations, the accidents you’ve been involved in, and the number of auto insurance claims you’ve made.
  • Your credit history including credit score, bankruptcies on record, and whether you own a home.
  • The type of car you’re insuring, its age and how much you drive each year.
  • The amount and type of coverage, plus the deductibles that you request.

Clearing up the confusion surrounding how auto insurance rates are calculated is hopefully all the incentive you need to start shopping for a more competitive auto insurance rate!