How Is Car Insurance Calculated?

Have you ever looked at your auto policy documents and wondered why your premium increased, decreased, or is the way it is? Or perhaps you’ve questioned how the rate is calculated?

For those seeking insurance quotes, one common question is: What will my quote be, and how does an insurance company determine it? You might be curious if factors like age, gender, location, car type, or driving history play a role. The truth is, it’s a combination of these factors and much more.

Understanding how insurance companies determine auto rates can give you valuable insight into how premiums work and might even help you save on your auto policy.

Below are some of the factors that insurance companies use to determine auto insurance rates:

1. Number of Years Licensed and Insured (History and Driving Record)

In the years that you have been insured in your jurisdiction, have you had any accidents or convictions, in the form of speeding tickets or other related traffic violations?

These records are looked at by companies to determine if you are a higher risk driver and more likely to get into an accident. If you have a cleaner record, you are likely to pay a lower premium than someone with accidents and tickets on their record.

I mentioned jurisdiction earlier because some companies only count the number of years that you have been licensed and insured in the jurisdiction you are residing in.

2. The Area You Live In

One of the factors insurance companies use to determine premium is the area you live in. People who live in larger cities are likely to pay higher premiums than people who live in smaller cities.

Highly populated areas tend to see more auto accidents because there are more road users. These areas also tend to see more vandalism and theft claims. For example, if you live in a city of about one million people, you are likely to pay a higher premium than someone who lives in a city of about 30,000 people.

Read: The Top 5 States with the Highest Auto Insurance

3. The Kind of Car You Drive

The year, make and model of the vehicle you drive could potentially affect your premium. Insurance companies look at the likelihood of your car being in an accident, how often such cars are stolen, vandalized, extent of damage and what the repair or replacement cost is likely to be.

The higher it costs an insurance company to repair or replace your vehicle, the higher the premium you will pay.

Also, if you have a brand-new vehicle, you are likely to pay more than someone insuring an older vehicle. Some insurance companies might offer discount for cars that have safety features. For example, if your car has an autonomous braking system, some insurance companies offer a discount for this type of feature. Always mention to the company you are getting a quote from if your car has any safety features, as you may qualify for a discount.

Read: How Auto Insurance Companies Value Your Car

4. Car Usage

What you use your car for affects your premium. For example, if you are driving to and from work everyday, there is a higher chance of an accident compared to if you are using your car to just go grocery shopping or visit friends occasionally.

Since you are commuting to and from work every day, you pose a higher risk, so you will pay a higher premium than someone using their car for pleasure use only. Some people use their car for some occasional business, like ride-sharing businesses, if you use your car for Uber or Lyft, some insurance companies that accept this type of risk will charge you an additional premium.

Read: Making Money Through a Ridesharing Service? Here’s What You Need to Know About Your Insurance

5. Age and Gender

Teenage drivers are more likely to be in a car accident than mature drivers. For some insurance companies, drivers below the age of 25 pay a higher premium and start to see a decrease in premium after they have clocked 25.

The more mature you become, the less risk you pose of being in a car accident due to having a longer history of safe driving skills, thus the lower your auto insurance premium.

However, mature drivers will begin to see an increase in premium as they get older, say around 70 to 80 years of age. This is because the older you get, aging and other health related issues begin to impact driving, therefore posing higher risks.

Generally, male drivers pay a higher premium than their female counterparts. As biased as this may sound, statistics have shown that male drivers, especially younger ones pose a higher risk on the road and are more likely to get into accidents than female drivers. Female drivers are considered to be more careful. This does not mean that if you are male and have a good driving record, you will still pay more than your female counterpart, who does not have a clean driving record.

Read: 10 Ways to Reduce Your Auto Insurance Rate

6. Marital Status

Something as simple as your marital status can affect the amount of money you pay for car insurance. If you are married, you might pay a lower premium than someone who is single. Some studies have shown that, people who are married tend to adopt more responsible driving habits than people who are still single.

This varies from company to company as not all insurance companies consider marital status as a factor.

7. Coverage and Deductibles

Some coverages are mandatory, some optional, the coverage you choose will determine the amount of premium you pay. For example, if you purchase a vehicle and decide to go with the most basic insurance coverage required for you to be able to drive your vehicle, you might pay a lower premium than someone who decides to go with full insurance coverage.

A deductible is the portion an insurance company requires you to pay out of pocket in an event of a loss. This can also be deducted from your claim payment during a claim settlement.

If you choose a higher deductible, the lower premium you will pay. For example, in most parts of Canada, auto coverages, such as All perils, Specified perils, Collision and Comprehensive require a deductible. If you choose a higher deductible for any of these coverages, you are likely to pay a lower premium than someone with a lower deductible.

Read: An Overview of Insurance Deductibles

8. Credit Score

Some insurance companies use your credit history as a factor in determining the amount of premium you pay. They might run a soft credit check with your consent.

If your credit score is good, you might get a lower premium than someone who’s credit history is bad.

9. The Company

Insurance market is a competitive one. There is no fixed price and every company is different.

It is important to always shop around, inquire from different companies, compare rates to make sure you getting the best price for the best coverage.