Who Sets Auto Insurance Rates

By Lorraine Watkins on November 25th, 2009

Auto Insurance

If you've shopped for auto insurance and received different quotes from different carriers, you may wonder how insurance rates are set in the first place. Insurance companies are regulated by a department of insurance or similarly named body within each state where they do business. State insurance departments provide information on the number of auto insurance claims and their severity by zip code to insurance carriers--this information helps insurers calculate risk and set their rates. State insurance departments also enforce state laws pertaining to how insurance is sold.

Within the confines of the state regulations, though, insurance companies set their own rates.

Insurance Companies' Profit Calculations

The objective of insurance carriers--like all companies--is to maximize profit. If they set their rates too high, they will not attract enough buyers; if they set their rates too low, they may sustain losses that aren't covered by the premiums they receive. This balance ultimately determines how rates are calculated.

Determining Factors for Car Insurance Rates

The auto insurance premium you pay is determined by how "risky" you are to the insurer. Many factors go into this risk assessment, including your driving behavior, demographics, neighborhood statistics, and coverage options:

  • Your driving record. Insurance carriers believe that past behavior is a predictor of future behavior. Expect your insurance rates to adjust upwards if you file a claim.
  • Year, make, and model of your vehicle. The more expensive and the newer the vehicle, the more it will cost to insure it.
  • Years of driving experience. Experience behind the wheel is a good thing that lowers your premium.
  • Your age. Drivers under 25 are considered higher risk, since statistics show that younger drivers are more likely to be in collisions.
  • Your gender. So much for the myth about women being bad drivers! Men are considered higher risk, at least while they are young.
  • Number of miles driven each year. The more you drive, the more you will pay.
  • Number of drivers using the car. There is often a discount for a spouse but an surcharge for teen drivers.
  • Where you live. Your home zip code can help predict the likelihood of damage to your vehicle.
  • Where you park your car. If you park your car in your garage at night, you will pay less than if it is parked on the street. The same applies to where your car is parked while you work.
  • Level of coverage purchased. If you own your car outright, you might opt to carry the minimum coverage required by your state. If you are making payments on a car loan, your lender will generally dictate how much coverage you must have. In any case, the more coverage you buy, the more you will pay in insurance premiums.
  • Deductibles. The more you are willing to pay out-of-pocket before the insurance company payments kick in, the less you will pay for your policy. However, be sure that in the event of an accident you are actually able to cover your deductibles--otherwise you may be leaving yourself open to a lawsuit.

Auto Insurance Rates: It's Not Just About You

So after the insurance company has collected all your information, how does it set your rate? There are two other critical calculations they must make, and they have nothing to do with you:

  • How many drivers like you have made claims in the past year?
  • How expensive were those claims to the insurance carrier?

The total claims across all drivers for that insurance company will be the lowest number it must recover from auto insurance premiums. After all, the insurance company must take in at least enough to cover payouts, then make a profit on top of that. Together with different operating costs between carriers, the company-specific claim history helps explain why rate quotes might be different from insurance company to insurance company, even if you provide the same information to each and ask for a quote for the same coverage levels.

Because auto insurance rates can vary dramatically from one company to another, it's worth a little shopping each year before your policy comes up for renewal. With a few clicks of the mouse, you can have several quotes that may save you money.

Lorraine Watkins

Lorraine Watkins is a freelance writer and a regular contributor to business and education websites. She holds an M.A. in English from California State University, East Bay.

Source :
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