Are you wondering what auto insurance companies consider when they set premiums? While underwriting algorithms vary between insurers, they're typically based on a combination of similar factors. To help you better understand what goes into your monthly car insurance cost, here's a detailed look at the common factors broken into six categories; personal, vehicle-specific, location, coverage, general, and discounts.

Fast fact: The average cost for liability, collision, and comprehensive car insurance is $1,126 per year or $93.83 per month, according to the National Association of Insurance Commissioners¹.

Personal factors²

When determining your premium, auto insurance companies assess the level of risk you present as a driver. To do so, they look to statistical data on various personal factors, including:

• Age and driving experience: Younger and less experienced drivers are more likely to be involved in accidents so insurers generally charge higher premiums to drivers under 25³.
• Gender: Statistically, women are less likely to be involved in accidents, including more severe ones and those involving DUIs. As a result, they often pay lower premiums than men⁴.
• Marital status: Records indicate that married policyholders have fewer claims than their unmarried counterparts, often qualifying them for lower rates⁵.
• Driving record: A history of recent accidents and moving violations or convictions for any driver on the policy will often increase premiums⁶.
• Claims history: Recent auto insurance claims signal more risk and lead to higher premiums⁷.
• Prior insurance coverage: Insurers often charge more if you've been uninsured or have had a policy canceled or non-renewed in recent years⁸.
• Number of drivers (and their driving experience): Policies covering multiple drivers, especially those with less experience or poor driving histories, are considered higher risk and will cost more⁹.
• Credit (where applicable): In many states, insurers use credit-based insurance scores to predict the likelihood and cost of claims. Drivers with better scores often get lower premiums¹⁰.

By considering these personal factors, you can get an idea of where you sit on the risk spectrum as a driver. For example, a 30-year-old, married female driver with a clean driving record and excellent credit would likely get a relatively low premium. On the other hand, a 20-year-old single male with fair credit and a few recent accidents would get a higher premium.

Vehicle-specific factors

While personal factors play a major role in determining your auto insurance premium, they're only part of the equation. Auto insurance covers your vehicle against damage from a variety of accidents, so insurers also consider vehicle-specific factors such as:

• Car value: Your car's make, model, and year determine the cost of repairs or replacements—the more expensive your car, the higher the premiums¹¹.
• Annual mileage: The amount of miles you drive each year impacts the risk you present. Lower mileage will lead to lower rates¹².
• Safety features: Vehicles with advanced features like automatic emergency braking and blind spot monitoring may qualify for premium discounts¹³.
• Risk of theft: Vehicles that tend to get stolen more often will have higher premiums¹⁴.
• Engine size: Vehicles with larger engines or higher horsepower accelerate faster and reach higher speeds which leads to more risk and higher premiums¹⁵.

With these factors in mind, let's consider two drivers with identical profiles (age, driving record, location, coverage needs, etc.) but two very different vehicles; a sports car and a family sedan. The sports car will cost more to insure due to presenting more risk across the board, from car value to engine size.

Vehicle 1: Ford Mustang GT

• Car value: A $50,000 high-performance sports car with a sleek design and relatively expensive parts.
• Annual mileage: Frequently driven long distances for recreational purposes (20,000+ miles/year).
• Safety features: Equipped with advanced safety features, but the focus is on performance over safety.
• Risk of theft: Sports cars are popular targets for theft, raising the premiums.
• Engine size: A powerful V8 engine with high horsepower, capable of rapid acceleration.

Result: Higher premiums due to the car's value, high risk of theft, large engine, and frequent use.

Vehicle 2: Toyota Camry

• Car value: A $30,000 midsize sedan designed for practicality and safety.
• Annual mileage: Primarily used for commuting and errands (10,000 miles/year).
• Safety features: Includes automatic emergency braking, lane-keeping assist, and blind-spot monitoring.
• Risk of theft: Family sedans are less likely to be stolen than sports cars.
• Engine size: A modest 4-cylinder engine, prioritizing fuel efficiency over speed.

Result: Lower premiums due to the car's lower value, reduced risk of theft, smaller engine, and fewer miles driven.

Location-based factors

Where you live and keep your car will also impact your premiums. Some areas present a higher risk of accidents, vandalism, theft, and natural disasters than others. For example, suppose you live and park on the street in a densely populated Los Angeles area with heavy traffic and a high crime rate. You'll present a higher risk than someone who lives in a safer rural area or quiet suburb and parks their car in the garage¹⁶.

Your location also impacts the regulations auto insurers are subject to which can impact your costs. For example, states set the minimum coverage limits, the factors they allow insurers to use when calculating premiums, and the premium increases they allow. As a result, your costs could change simply by moving from one state or city to another.

Policy choices and coverage levels

Another key factor in your premiums is the details of your auto insurance policy. More specifically, the following elements of your coverage:

• Deductibles: Insurers require you to pay a set amount out-of-pocket when you file certain types of claims (e.g. collision, comprehensive). Choosing a higher deductible lowers premiums but increases out-of-pocket costs when you file claims.
• Coverage levels: All U.S. states (except for New Hampshire), and the District of Columbia, require you to maintain a minimum amount of liability coverage, but allow you to add additional types of coverage and higher coverage limits in exchange for higher premiums.
• Add-ons and riders: Add-on coverage like roadside assistance or rental car reimbursement can provide helpful protection, but will also increase your premiums.

Auto insurance companies often allow you to adjust your deductible amount, coverage types, and coverage levels. You can then see how different configurations will impact your premium and find the right balance for your situation.

General rate increases

Insurance premiums are also impacted by general rate increases that result from forces beyond your control, such as inflation and economic downturns¹⁷. Insurers regularly reassess risk based on the economy, claims data, fraud trends, and catastrophic events like natural disasters, and make rate adjustments that affect all policyholders. As a result, you may see your premiums increase when you renew even if nothing has changed with you or your situation. For example, car insurance premiums often increase when car values go up, the cost of repairs and parts increases, and the cost of business expenses like electricity and wages rise¹⁸.

Discounts

Lastly, discounts can play a big role in the cost of car insurance. Most auto insurance companies offer a lineup of them, such as¹⁹:

• Anti-theft discounts
• Bundling discounts
• Defensive driving course discounts
• Good driver discounts
• Good student discounts
• Low-mileage discounts
• Multi-car discounts
• Paid-in-full discounts
• Paperless/eDocument discount
• Safe driving discounts based on telematics data
• Student away at school discounts

But how much can they save you? The amount varies by discount and insurer but they often range from around 5% to 25%²⁰ off your premium. Here's an example of how they can work.

Alex owns a midsize SUV and a home in the suburbs and wants to reduce his insurance premiums without sacrificing his coverage. He pays $1,500 per year for auto insurance and $1,200 for homeowners. Alex decides to switch both his auto and homeowners policies to the same insurer and qualifies for a 15% bundling discount. He also finds out he can save 10% due to qualifying for a good driver discount with the new insurer. As a result, he saves $555 total by reducing his auto insurance premium from $1,500 to $1,125 and shaving $180 off his homeowners insurance policy.

Original costs:

• Auto Insurance: $1,500
• Homeowners' Insurance: $1,200
• Total: $2,700

New costs after discounts:

• Auto Insurance: $1,125 ($1,500 - $225 from bundling and - $150 from good driver discount).
• Homeowners' Insurance: $1,020 ($1,200 - $180 from bundling).
• New Total: $2,145

As you shop around and compare car insurance companies, be sure to check the discounts they offer. Look for an insurer that will offer you the best overall value after all the discounts are factored in.

Find the best premium for your situation

Auto insurance companies calculate premiums based on market conditions, along with factors like your personal demographics, vehicle, location, and coverage details. While you can't control every aspect of the risk assessment process, there are steps you can take to reduce your costs.

Start by comparison shopping to find the most competitive rates for the coverage you want. As you do, be sure you're factoring in discounts and tailoring your policy to fit your needs. Additionally, consider bigger changes, like switching to a lower-risk vehicle or completing a defensive driving course to enhance your skills and reduce your risk profile.

If you want personalized guidance from an expert, InsureMe Advisors are standing by. They can assess your situation, compare options, and help ensure you get a competitive deal. Contact us today to get started!