Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001 and has an undergraduate degree from Manhattan College in ...

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Written by Shuman Roy
Content Writer & Entrepreneur Shuman Roy

Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Joel...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Jun 28, 2022

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Auto insurance companies don’t see us the way we see ourselves. They see us as a calculated “risk” with a mathematical chance of being profitable for them.

Think of it this way. Imagine if your friends and family all asked if you would give them a loan. Now assuming you have a limited amount of money, how would you decide who to lend to?

Whether you realize it or not, you’ve probably already started the task of risk assessment to determine who is least likely to cause problems and put your money at risk.

You’re likely ranking them from best to worst in odds of repayment. And you’re probably trying to recall everything you can about their past performance, with regard to finances and responsibility, to ensure you don’t “make a bet” that won’t pay off.

To take it one step further, if you had to lend money to all of them, would you charge more interest to your younger, irresponsible cousin than you would your older aunt with a perfect credit score?

Congratulations! Now you’re thinking like the insurance companies.

Is it complicated to determine car insurance rates?

  • Insurance companies perform a risk assessment
  • To determine how much to charge for car insurance coverage
  • They rely on a variety of data and numerous reports
  • To come up with a premium based on the likelihood of you filing a claim

Insurance companies perform the same assessment of us when deciding how much to charge for car insurance coverage.

They use every bit of available data compiled over several years in order to predict the statistical frequency with which people in your “group” file insurance claims, while determining the average amount of claims payments made to “people like you.” Then, of course, they charge accordingly.

While it typically takes an advanced degree in mathematics to be one of the chosen ones who calculates rates for insurance companies, a Rocket Science degree is not necessary to determine that 50,000 newly licensed teenagers will cost an insurance company more money in claims payments than 50,000 35-year old married women. We should all be able to agree on that!

[How much is car insurance for a 16 year old?]

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Which rating factors do car insurance companies use?

  • Car insurance companies use rating factors
  • Which include aspects of you the driver and attributes of the vehicle
  • Then once you choose your desired coverage
  • They can compute an appropriate auto insurance premium

Insurance companies use rating factors to determine how much to charge you for coverage. Rating factors are individually specific bits of data about each driver, vehicle, and requested coverage that are easily measured and easy to translate into an overall insurance premium.

Car insurance costs are affected by a variety of factors, from the type of coverage to your driving record or where you live. Other factors that affect insurance prices are the cost and frequency of litigation, medical care, repair costs, and weather trends.

Insurers also look at how safe a vehicle is to drive, whether it protects the driver and its passengers, as well as how much potential damage it can cause to another car. If a certain car model is more likely to cause damage in an accident, insurance companies may charge more for liability insurance.

Moreover, the more coverage is required in your state, the more you’ll have to pay for car insurance. Teen drivers pay higher car insurance rates compared to experienced drivers. Some of these factors can be controlled, such as your credit history, or your driving record. But other factors such as your city’s population or age are out of your control.

Of course, you’re not here to read the mind-numbing details of the mathematical algorithms used by insurers to arrive at a premium.

So we’ll just give you the basic pieces of the rating puzzle to demonstrate how insurers decide how much of your budget will go toward your car insurance premium.

What car insurance companies consider when pricing your premium?

  • Your age is a very important driver of car insurance rates
  • As is the vehicle itself, including how you intend to use it
  • Your driving history is also key, as is your location and gender
  • The coverage you pick can also greatly affect your premium price, with choices like deductible amount playing a big role

Below is a summary of the rating factors car insurance companies use to determine how much they charge:

Your age – Generally, the younger the driver, the higher the rate. As we age, we of course gain more experience behind the wheel and experience fewer accidents.

[Is insurance higher for a person under 25?]

The coverage you need – Your premium will be higher if you require full coverage – which includes physical damage coverage – rather than opting for a liability-only insurance policy.

How you use your vehicle – You may use your car for business every day, which is generally more expensive, or perhaps you only drive for pleasure, which means you probably drive it less than a car used for business.

Most of us simply use our cars to drive to work, which is usually rated somewhere between pleasure use and business use.

The amount of miles you intend to put on the vehicle each year also matters, as more time behind the wheel means more opportunity to get into an accident.

[Commercial auto vs. business auto insurance coverage]

Your insurance score – Similar to your credit score, your insurance score is a statistically proven indicator of your probability of filing an insurance claim – and costing your insurer money.

Your gender – Women typically have less auto accidents than men, so their rates are usually lower. Yes, car insurance is nearly 10 percent cheaper for women. It’s always a good idea to be in the “group” that generally costs insurers less money in the form of paid claims.

Where you live – Normally, this is referred to as the “garaging address.” Basically, wherever you live and park your car at night. Because there are more cars in densely populated areas, the probability of getting into an accident is higher, so city rates tend to be higher.

Are you married? – This rating factor is geared toward males. Unmarried males, when younger, tend to get in more accidents than married males, so unmarried males have to pay more for their auto insurance. As you can see, marital status does play a role in determining car insurance rates.

Your chosen liability limits – The higher your liability limits, meaning the more money the insurance company would have to pay if you are found liable (at fault) for an accident, the more they are inclined to charge you. This should not deter you from choosing high limits, as higher limits provide more protection.

Your driving record – There are two reports typically used to determine your driving record. A motor vehicle record, or MVR, and a C.L.U.E. report. The MVR tracks automobile claims, and the C.L.U.E. report tracks claims you have made for any type of insurance. Of course, the more accidents and tickets found on your record, the higher your insurance rate.

The type of vehicle you drive – Without getting into too much detail, more expensive cars call for higher insurance rates. However, it is important to note that this is only the case if you request physical damage coverage. If you do not request this coverage, the insurance company is not responsible for repairing or replacing your car in the event of an accident.

[Is insurance higher on red cars and convertibles?]

Your chosen deductible – The higher the deductible you choose, the lower your insurance rate. But if you get into an accident and need repairs, you’ll be paying a larger chunk of the costs.

Ultimately, if you choose a higher deductible, it means you’re more willing to self-insure your vehicle. Insurers like higher deductibles because it means you have more skin in the game.

Tip: There are multiple discounts available to you to assist in lowering your car insurance rates.