How Do Insurers Determine Auto Premiums?

Jim TrummSep 27, 2017

Automobile insurance costs can seem like random numbers at times. Next door neighbors with identical driving records and identical cars can pay different amounts for identical coverage. The premiums you pay in one state may be radically higher or lower once you cross a state line, even if that state line is just a hundred feet away. 

Men and women are charged different amounts for the same coverage, as are the young, the middle-aged, and the elderly. People with lower credit scores can be charged more than people with higher ones. Students with higher GPAs may be charged less than people with lower grades. People from the same neighborhood whose daily commute takes them over different roads may pay unequal premiums.

Though it may seem otherwise, the cost of auto insurance is not randomly determined. Rather, it’s influenced by a variety of factors, all of which affect how much of a risk your insurance company thinks you are taking every time you get behind the wheel. Your insurer will find out a lot about you, plug what they learn into an algorithm that’s programmed to assess risk, and come back to you with a premium.

How Are Auto Insurance Premiums Determined?

When insurers look at a prospective new customer, they will try to find out as much as they can about the person's place of residence, identity, history, and the vehicle to be insured. This information is then evaluated to determine how much of a financial risk this person may pose to the insurance carrier. The lower the risk of having to cover a claim on that person's policy, the less the insurer will charge.  

Where Do You Live?

Because insurers are licensed to do business state by state, their risk pools are determined state by state as well. Some states’ drivers tend to get into more accidents than others'. Their insurance premiums will therefore be higher. Different states also have different laws that regulate how easy or difficult it is to successfully sue another person for injuries caused in a car accident. Some states have notoriously generous juries when it comes to assessing damages, while others are notably stingy. 

So, even people who live very close to each other but are separated by a state line may pay significantly different insurance premiums. For example, people who live in Ohio pay an average car insurance premium of $926 a year, but people who live in neighboring Michigan pay an average of $2,551 a year. That means that people who live in Monroe, Michigan may pay a lot more than people in Toledo, Ohio pay, even though Monroe is often considered to be part of Toledo’s metropolitan area.

What’s Your Address?

It’s not just your state of residence that determines your premium. Your zip code and even the number of the street you live on may affect your insurance bill. Some neighborhoods have a much higher incidence of car theft and vandalism than others do. 

Furthermore, some may have streets and intersections that are much more prone to car accidents than other streets and intersections. The more dangerous the roads near your house are, the higher your premiums may be.

How Do You Get to Work or School?

Your commute also plays a role in determining what kind of an insurance risk you are and how you will be charged. Again, some routes and roadways are more dangerous than others. Some insurance companies will give people a discount on their policies if they commute to work by public transportation or by biking or walking. 

They do this not just to promote public transit, but because people who walk, bike or take bus or subway to work or school are less likely to be in a motor vehicle accident that people who drive. As a consequence, they pose less of an insurance risk and can be charged less.

Are You a Man or a Woman?

Sorry, guys. We get in more accidents than women do, especially when we’re younger. And we are charged accordingly.

How Old Are You?

Your age is a significant factor as well. Younger people are statistically much more likely to get into accidents than older people. And elderly people are slightly more likely go get into accidents than middle aged people are. Insurance rates generally will drop for people as they get older until they reach their mid- to late-fifties, at which point they may start to rise slightly.

What’s Your Driving Record?

Your driving record is another big factor in determining your insurance rates. If you seem, shall we say, accident-prone, your insurance company will charge you higher premiums - sometimes much higher premiums, especially if you’ve been in serious accidents where alcohol was involved. Some insurance companies market this fact of life as a benefit, advertising it as a safe driver discount. But whether you consider it a discount for safe driving or a charge for unsafe driving, how you drive has a significant impact on how much you pay.

What’s Your GPA?

If you’re a student and you spend your nights studying at home or in the library, you are less at risk for getting into an automobile accident. Also, there may be some correlation between good grades and good judgment. So some insurance companies will offer a good student discount on their premiums. Nerds rule!

What Kind of a Car Do You Own?

The make, model, year, and value of your car affects your insurance premiums – often in ways that you might not expect. It’s logical that since a new Bentley costs a lot more than a used Dodge, the owner of the Bentley will pay more for comprehensive insurance because the cost of repairing or replacing his car is so much more than the Dodge owner’s cost. 

The more your stuff is worth, the more you pay to insure it, right? Less obvious, though, are the risk factors associated with particular types of cars. The more a vehicle seems like a sports car, the more its insurer may charge for liability insurance. Why? Because as a very general proposition, people who drive sports cars drive faster and more recklessly than the drivers of comparably-priced family sedans.

What’s Your Credit Score?

This factor, which is increasingly relied on in determining insurance premiums, is the most controversial one. Some insurers have concluded that there is a correlation between having a poor credit score and being at risk for getting into an accident – and they charge people with poor credit histories more. This outrages some industry critics, who point out that people’s credit scores are frequently damaged by things far outside their control, such as illnesses and layoffs. They ask what a person’s credit score has to do with how they drive. And they point out that imposing higher premiums on people with low credit scores places a disproportionate financial burden on the poor. 

One study found determined that credit scores that are merely “good” rather than “excellent” can add anywhere from $68 to $526 more per year to an auto insurance premium. Several states, including California, Massachusetts, and Hawaii now ban the use of credit scores in setting insurance rates, but the practice is still legal in the rest of the country.

So What Can You Do To Lower Your Insurance Bill?

From the above, it’s clear that to get the lowest rate, you should be a middle-aged woman who drives an ordinary sedan, lives on a safe street in a state with low insurance premium averages, walks to work, has a flawless driving record and an excellent credit history. 

Like it or not, insurance rates are influenced by averages, correlations, and tendencies. You might be the best, safest driver in the county, but if your county is in a high-risk area in an expensive-insurance state and you drive a sports car and have poor credit, you’re going to pay more. 

To make sure you are paying the lowest possible rates given your situation, shop in our top ten car insurance recommendations for a good deal. There are a lot of things that determine the cost of your car insurance that are out of your control. Your choice of an insurer, however, is something you can decide. Choose wisely!