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How Auto Insurance Companies Calculate Risk
The insurance industry is a world of calculated risk. Car insurance companies base their rates on how likely you are to file a claim in the future, and they use a number of varying factors to determine that risk.
While it is impossible to know the exact formula any auto insurance carrier uses to calculate risk and determine premium rates, knowing common rating factors can help you shop smarter for your car insurance. It can also help you understand how changes in your life may affect your current policy's premiums.
Driving History Is a Key Factor
If you have had many accidents in the past, car insurance companies logically assume that you are likely to have more accidents in the future.
For this reason, auto insurance companies use your driving record* to calculate your risk profile. They may look at:
- Any accidents in which you've been involved.
- Any moving violations for which you've been cited.
- Whether your license has been suspended or revoked.
Because your driving history plays such a large part in your rates, you may have a policy identical to that of another customer, but your premium may be dramatically different. A customer who presents a higher perceived risk than another will pay higher rates.
The easiest way to get good rates is to be a safe driver.
* Typically, insurance companies can only view your driving record over the previous 5 years, depending on state law.
Demographics Affect Risk Calculations
Car insurance companies consider demographic characteristics as they calculate the risk associated with insuring you. Consider the following:
- Drivers under 25 years old and those over 65 years old are statistically more likely to be involved in accidents and typically pay higher rates.
- Men are also statistically more likely to get into accidents than women and pay higher premiums on average.
- Your marital status can be used to set your rates as well, with married individuals on average at lower risk for accidents than single adults.
- Students are generally considered more responsible, and so will usually get a discount for getting above a B average.
The other individuals on your policy also affect your risk and therefore your rates. Very young drivers, very old drivers, and those with poor driving records will likely raise your policy rates.
To learn more about the demographic factors used to determine premiums, visit our Rating Factors section.
Your Credit-Based Insurance Score
Some states allow car insurance companies to look at your credit-based insurance score when determining your premium or deciding whether to sell you a car insurance policy.
Low credit scores have been correlated with risky driving behaviors and poor driving records. This means that if your credit-based insurance score is too low, you face the possibility of being deemed high risk of filing a claim.
Your credit-based insurance score is similar to your credit score, but it does not include as many factors. In states where it is permitted, the majority of car insurance companies may look at the following to calculate your score:
- Payment history.
- Length of credit history.
- Whether you have recently applied for new lines of credit.
- What type of credit you have, e.g., loans, credit card, mortgage.
Occupation and Location
Your occupation also affects your car insurance rates, as certain occupations are correlated with higher numbers of accidents. High-risk professions include, but are not limited to:
- Business executives.
Low-risk occupations include teachers and first responders.
To learn more about which occupations are associated with higher and lower risk, visit our page on how occupation affects your car insurance rates.
Location and Crime Rates
Location plays heavily into your car insurance rates. Individuals who drive more are at higher risk for accidents, so car insurance companies are likely to request an estimate of your annual mileage when you are shopping around for auto insurance.
Your risk of needing to file a claim also increases if:
- Your neighborhood has heavy traffic.
- Crime rates are high in your neighborhood.
- For example, if vandalism and theft are common in your location, your comprehensive car insurance coverage may cost more.
- You drive a vehicle that is a common target for theft.
Shopping for Cheap Car Insurance Rates
Because car insurance companies given certain factors more or less weight, it is virtually impossible to know how the company calculates risk and, in turn, what your premium will be. This is why it's so important to comparison shop for your auto insurance policy.
Make sure to check the prices for at least 3 companies before settling on one, as you may be afforded significantly cheaper car insurance premiums from one company. You can compare prices quickly by getting free car insurance quotes online.