How Insurers Decide Your Auto Insurance Rate

When shopping for the best auto insurance rates, you’ll find a recurring theme in the information that prospective insurers collect in order to quote the cost of a premium. Common questions such as your name, social security number, zip code, car make and model, and estimated miles driven each week, are probably expected. However, other inquiries around your lifestyle, education level, occupation and number of children may surprise you, given that they have seemingly little to do with auto insurance. Here’s the inside scoop on how insurers decide your auto insurance rate.

Categorizing to Predict Risk
Accurately predicting risk is the foundation of the auto insurance industry. When insurers take on clients who make claims because of an accident, vehicular theft, damage or similar events covered under the policy, it costs the insurer money. The fewer claims an insurer has to pay, the better the company’s bottom line is. However, the auto insurance rests on the unknown. To eliminate the uncertainty, insurance companies rely on predicting the risk that you as a potential customer present, to arrive at the premium you’ll pay.

Barring a longstanding relationship you may have with your insurance agent, however, most auto insurers only spend about 15 minutes with you before providing a quote for coverage. While that isn’t enough time to understand how responsible or risky you truly are, it is enough for an auto insurer to gather the answers needed to run a statistical analysis that determines risk, and calculates a premium appropriate to cover the potential cost of offering you auto insurance coverage.

Insurers use different predictive modeling techniques to separate customers into categories, based on the questions noted above, to arrive at an expected average loss per group. In its simplest form, where you stand in various groupings determines your “ballpark” pricing. Beyond the broad “buckets,” there are personal factors that can either lower or boost the auto insurance rates you’ll pay.

Your Finances
While all insurance companies, and the states they operate in, vary in their regulations and policies around how your credit information is used, and to what degree it impacts your premium price, your financial health does play a role. Auto insurers arrive at a credit-based insurance score (CBIS) based on various pieces of financial data, which might include bankruptcy, foreclosures, liens, payment history, credit accounts in use, outstanding debt, length of credit history and homeownership.

According to an FTC report gathered in 2007, most insurance companies use some form of a CBIS in assessing risk, especially for prospective customers with whom they have no past history. Despite the influence that your CBIS plays in what you pay for auto insurance, most insurers use a proprietary formula that is kept closely guarded within the company. In short, you’ll never know exactly how much your credit score helped, or hindered, your auto insurance rates. While having “bad credit” probably won’t lead an insurer to a flat-out denial of your application, maintaining good credit and paying bills can also cost, or save, you money on auto insurance.

Your Lifestyle
Married people are perceived as less risky than single people, as are couples with children versus those with none. If you’re under the age of 26 and male, you’ll pay more for auto insurance. Your occupation and education play a role, too. Some occupations, such as engineers, teachers and scientists are statistically less risky. People in these careers may pay a lower auto insurance premium.

If you’re currently enrolled in high school, college or higher education, and are receiving good grades, then your hard work can lower your auto insurance rates, too. If you belong to an alumni association or certain professional organizations, you may also qualify for a “group” relationship that can actually lower your premiums. If you carry other types of insurance, like a homeowners’ insurance policy, and you’re willing to switch the coverage to your auto insurance provider, it can lower your rates, too.

Where, When and What You Drive
New cars will almost always cost more to cover than older cars because they cost more to replace if damaged. Individuals who drive long commutes to and from work pay higher premiums, simply because more drive time means greater odds of vehicular damage or collision. The duration of time you’ve held a license, and your driving record dictates premiums positively if you’ve got a history of very few traffic tickets or accidents, and negatively, if you’ve had legal issues as a driver. Lapses in auto insurance coverage of more than 30 days will drive your premiums upwards, too.

The Bottom Line
Shopping around for auto insurance rates is the first step to finding competitive auto insurance rates, but greatest control over rates starts with you: Be a responsible driver and avoid costly accidents and tickets. The fewer claims you make and tickets you receive, the lower your auto insurance rates will skew.

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