How Do Car Insurance Companies Determine Rates?


What are rating factors and how do they affect your auto insurance premium?

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10 min read
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If you’re one of the 250 million drivers in the United States, you’re required by law to have car insurance. And whether you’ve shopped for several policies throughout the years or are a new driver, you may have a lot of questions about how your car insurance rate is calculated.

How can it be possible that you and your best friend or nextdoor neighbor or even your twin have so much in common – maybe you even drive the same car – yet you pay wildly different amounts for car insurance? That’s a question we get a lot here at The Zebra. So how do car insurance companies determine what you pay? The long answer involves a lot of math and statistics… but we’ll break it down for you in black and white.

How Do Car Insurance Companies Determine Your Rates?

Insurance companies look at:

  1. Where you live and drive
  2. What kind of vehicle you drive
  3. How you drive, including your history of accidents
  4. And who you are — that is, some basic info about you

For each category, insurance companies ask a number of questions, which are broken down into rating factors.

What is a rating factor?

A rating factor is basically a characteristic about you and your behaviors or a detail about your car which insurance companies use to assess the likelihood of you filing a claim. Insurance companies enter your set of rating factors into their unique rating algorithms to determine your premium – that is, what you pay for insurance coverage.

Insurance companies are taking a risk when they’re insuring you — a risk that you will file a claim and a risk that you’ll be able to pay your premiums. Each person poses a unique risk based on their rating factors related to their driving history and habits, and that’s where your rates start to look different from your neighbor’s.  

We’ve listed out the most critical and common rating factors:

1. WHERE YOU LIVE

Your Zip Code

You may have heard about some states being more expense for car insurance than others. Believe it or not, location matters down to the zip code. Like everything else for car insurance, it’s about statistics. Insurance companies want to know about the zip code in which you primarily park your vehicle (read: your home address). Your zip code gives insurance companies an idea of the crime rates, weather trends, population density, and other stats which indicate likelihood of you filing a claim.

Other location-based factors that insurance companies take into account when calculating rates include local legislation, which changes the way companies do business in a particular state.

2. WHAT YOU DRIVE

In short, cars of higher value will cost more to repair or replace, and are a thus a higher and more costly risk to your insurance company.

Vehicle Make and Model

  • Luxury cars are the most expensive vehicle types to insure, followed by “green” cars (hybrids, electric, etc.), trucks, sedans, SUVs, and vans. In the event of damage, the luxury cars are more expensive to fix than more mainstream, cost-effective cars.
  • Cars with high-tech features may be more expensive to repair, so their rates may be higher.
  • Some foreign cars are more expensive to repair than domestic cars, so their rates may be higher.

Vehicle Age

  • A 5-year-old car is about 11% less expensive to insure than its current year model. Similar in theory to vehicle type, this is because the total value of your car is lower, making it less of an expense to repair or replace.

car insurance rating factors

3. HOW YOU DRIVE

Your driving habits determine (statistically) how likely you are to get in an accident – the higher the likelihood, the higher your premiums.

Primary Vehicle Use

These are mostly broken down into Personal/Commuting (the most common, as it’s for general commuting to work or school, car-pooling, and running errands), Pleasure (for vehicles that get occasional use), Farm (these require special license plates and for use in farming or ranching, Business (think realtors, home health nurses, traveling salesmen), and Commercial (probably NOT you: 18-wheeler, dump truck, etc.)

For Uber, Lyft or other rideshare drivers, you would get a personal policy with an endorsement for ridesharing. If you drive at all for delivery, you would get a Commercial policy.

Annual Mileage

Auto insurance rates do rise when you put more miles per year on the odometer, but not by much. The biggest increase in the national annual average premium occurs for those who drive more than 7,500 miles per year, which most Americans do. California is the only state with significant premium increases as miles driven increases, with a 25% difference in average annual premiums between those who drive 7,500 miles per year or fewer.

Your Driving and Claims History

Any accidents or tickets in the past three years would affect your car insurance rates – potentially by a lot. Violations such as DUIs, speeding, reckless driving, and causing an accident can hike your rates way up. In fact, a single DUI can raise rates more than $1,000 a year. (Yet another reason to never drink and drive!)

Any other claims you file with your insurance company could also affect your rates. You can access your CLUE report to see your claims history.

Your Coverage History

Whether you’re buying a new car, changing your policy, or switching insurance companies, maintaining continuous coverage is incredibly important because companies view drivers that are already insured as being financially responsible and therefore a lower risk. It does not matter if your coverage history is with different insurance companies, but it does matter how long you’ve been covered (rates generally drop at 6 months, 1 year and 3 years). Insurance companies consider a lapse in coverage (even for a day) as financially irresponsible behavior, so always make sure you’re covered.

4. WHO YOU ARE

Your Age

There’s nothing you can do about this rating factor, but it’s worth knowing. Statistically, drivers get in fewer accidents the older they get and the more driving experience they gain – to a certain age, that is. Teens pay the highest rates by far, and rates drop each year until age 60, when they start to increase slightly.

Your Marital Status

Insurance companies have found that married couples are statistically less risky to insure because they are less likely to file a claim than single, divorced, separated, or widowed drivers.

Your Gender

In most states, men pay slightly more for car insurance than women because men are statistically involved in more accidents than women – but not by much.  

Your Credit Score

As with many insurance rating factors, your credit score’s impact on your car insurance has to do with statistics and the likelihood that you will file a claim. The higher your credit score, the better. Raising your credit score by one tier could save you an average of 17% on your annual insurance premium.

Your Home Ownership

Owning your own house or condo generally indicates that you are financially responsible. According to insurance companies, the more financially responsible you are, the less likely you are to file a claim.

Your Level of Education

Insurance companies may ask what your highest level of education is, but the savings are minimal. With no high school diploma, drivers only pay $36 more per year than if they held a Ph.D. Some insurance companies offer a “good student” discount to any drivers listed on the policy who are enrolled in schools and can prove a “B” average or better.

car insurance rating factors

*Do All Insurance Companies Use All These Rating Factors?

Nope.

Since insurance is regulated by each individual state rather than the federal government, some state insurance agencies may prohibit the use of certain rating factors. For example, in California, Massachusetts and Hawaii, insurance companies cannot use a driver’s credit score as a rating factor. Insurance companies have to file their rating algorithms with the insurance agencies in every state in which they operate, and those agencies make sure the companies don’t engage in illegal or discriminatory rating practices.

It’s also important to consider the variations among the insurance companies themselves. We explained some of the key differences here for you:

Insurance Distribution

  • Direct: When insurance companies interact directly with consumers online without an agent (Examples: Geico, Progressive, Esurance)
  • Captive: When insurance agents/brokers sell a single insurance company’s coverage to consumers, usually through local agents at a brick-and-mortar office (Example: State Farm)
  • Independent: When insurance agents/brokers sell multiple insurance companies’ coverage to consumers

Underwriting Strategies

If you’ve ever wondered why there are so many different insurance companies, it’s because there are so many different people. These varied strategies represent how different companies focus on drivers bucketed by some traits they share which statistically indicate a certain level of risk. For example, some insurers specialize in drivers with multiple accidents, poor credit, and DUIs, while others target drivers who own multiple cars and live in rural areas.

  • Non-standard (higher risk)
  • Standard (average risk)
  • Preferred (lower risk)

What Can You Do to Affect Your Rates?

As we’ve seen, there are plenty of rating factors you can control, but plenty you can’t. The good news? There are still a number of ways to save money on car insurance. The Zebra’s own licensed insurance agent Neil Richardson advises drivers to: