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How Are Auto Insurance Premiums Calculated?

Matt Cullen

While most everyone understands that having auto insurance is necessary, knowing how the premiums are calculated is something that not many people are familiar with. Yet, having an understanding of what can make your premium rise or fall can help you in keeping your costs much lower - and over time, the savings can add up, significantly.

There are a number of factors that will determine the price of an auto insurance policy. These typically include the following:

  • Vehicle Type - Certainly, a primary criterion in how auto insurance premiums are calculated is the type of vehicle that is being insured. In most instances, newer and more costly vehicles will usually be pricier from an insurance standpoint. This is oftentimes because these vehicles will cost more to repair or replace if they are stolen or damaged. There can also be a certain risk factor involved with certain types of sports cars. For example, drivers of vehicles that tend to go faster are often more apt to get speeding tickets than those who are driving more "conservative" models.
  • Age and Gender of the Driver - The age and gender of the driver is another key factor in the price of one's auto insurance premium. This is because, statistically, certain age groups are more likely to obtain moving violations than others. According to auto insurance research, young male drivers (those who are under age 25) are typically more at risk of speeding, as well as being in an accident, than those who are over the age of 25. For this reason, drivers in this category will usually pay a higher amount on their auto insurance coverage.
  • How Often the Vehicle Is Driven - How often you drive your vehicle will also play a large part in how your auto insurance is priced, too. This is because the odds are greater that you will be involved in an accident if you are in your vehicle more often. Therefore, an insurer will typically ask you questions such as how many miles you drive each day to and from work, as well as whether or not you travel on a regular basis in your vehicle.
  • Past Driving History of the Insured - Your past driving history will also have a lot to do with the amount you will pay for your future auto insurance policy premiums. This is because insurers base future potential behavior on how you performed in the past. Therefore, if you have a history of moving violations and / or accidents - even if the accidents were considered to be minor - it is likely that your premium will be higher than if your past driving record is "clean."
  • Where the Insured Lives - While it may not appear to make a big difference, where you live can actually have a great deal to do with how much you pay for your car insurance coverage. There are a couple of reasons for this. First, geographically, the area of the country in which you live may experience poor driving conditions during certain times of the year. For example, those who live in areas that have icy winters will typically pay a higher amount of premium than those who live in areas that have a warm and dry climate year-round. In addition, your local living area can also play a role in your auto insurance premium. This refers to where your vehicle is parked on a regular basis. As an example, if your vehicle is garaged at your home, it is much more likely to be kept safe from weather damage such as wind and hail, as well as from theft and vandalism. Conversely, if your vehicle is parked regularly in the open - especially on the street - it is likely that the premium for your coverage would be higher.
  • The Policy Deductible - Your policy's deductible can be a major factor in the cost of your policy's premium. In this case, the lower the deductible, the higher the premium, and vice versa.
  • Eligible Discounts - Your premium could be affected by any discounts that you are eligible for - and this is usually a good thing. Some insurers offer premium savings for safe drivers and for students who regularly get good grades. Likewise, policyholders may also be able to obtain savings by transferring other coverage to the insurer such as their homeowners or life insurance. This way, they could become eligible for a multi-policy discount. It is always worthwhile to inquire about any potential discounts that you may be eligible for, as not all discounts are advertised.  

The Bottom Line on Auto Insurance Premiums

While understanding the math and science behind auto insurance premiums may at first sound overwhelming, it's really just a matter of knowing what insurers look for in terms of safety, and overall cost savings. Once you have a good understanding of what an insurer looks for, it is likely that you may be able to find a lower premium with an alternate carrier, or be able to reduce the premium that you have with your current auto insurer.

Photo credits (top image): UFV, Alan Cleaver, Pictures of Money