How is your Auto Insurance premium determined?
Insurance premiums are either mandated by the government or they are determined by the insurance company in accordance to a framework of regulations set by the government. Insurance companies usually derived the premium from calculations based on statistical data taking into account a wide variety of factors including:
- Profile of the driver including, age, gender and driving history
- Car Make and Characteristics
- Type of insurance coverage selected – Comprehensive, 3rd party
- Usage of the car including, commute to work or not and predicted annual distance driven
Profile of the Driver
- Age
Teenage drivers who have no driving record will pay higher car insurance premiums. However, some insurance companies offer young drivers discounts if they undertake further driver training on recognized courses. Also, in the U.S. many insurers offer a ‘good grade’ discount to students with a good academic record and ‘resident student’ discounts to those who live away from home. Generally insurance premiums tend to become lower at the age of 25. Senior drivers are often eligible for retirement discounts as this age group has a record of driving less miles.
- Gender
Men average more miles driven per year than women do, and consequently have a proportionally higher accident involvement at all ages. Insurance rates are generally lower for adult female drivers and most insurance companies offer a lower youth surcharge for young women drivers than for their male counterparts.
- Driving History
In most countries and states, a driver’s driving record is based on a point system. That is, moving violations, such as running red lights and speeding, results in the driver getting points allocated to their driving record. Since more points indicate an increased risk of future violations, insurance companies may review drivers’ records, and then raise the premiums accordingly. Accidents can also affect insurance premiums similarly.
- Marital status
Drivers who are married often receive lower premiums than a single person. The reason for this is that marriage is regarded as an indication of stronger financial stability within the household.
Car Characteristics
- Vehicle classification
Insurance companies look at the performance capability and the retail cost of the car. Vehicles that are considered luxury automobiles usually carry more expensive physical damage premiums because they are more expensive to repair or replace. Also, vehicles that can be classified as high performance will carry higher premiums because there is greater opportunity for risky driving behavior. Risk classification on cars also takes into account statistical analysis of reported theft, accidents, and mechanical malfunction on every given year, make, and model of that car.
Usage of the Car
- Distance & Use
Some insurance companies determine the premium based on how much the car is used such as, is the car used daily to and from work or only on weekends. The annual mileage of the car is sometimes recorded and these regular odometer readings aid the insurance company in verifying the risk – the more you drive your car, the more likely you are to get into an accident.
Typically, cars are classified based on whether they are used for driving to work, business, pleasure or farming. Cars used primarily for pleasure tend to have the lowest premiums, while cars used for business generally have higher premiums. Insurance companies determine classifications by the number of miles driven per year. Also, due to higher rates of vandalism, theft, and accidents, urban drivers pay more for auto insurance than those in small towns or rural areas.
Since so many factors affect your premiums it is important to take this into consideration when purchasing a car. Generally, the more expensive the car, the more you pay. Ask your insurance company about discounts for insuring more than one vehicle, accident-free driving, and others. Bottom line – drive carefully because drivers who are involved in accidents generally pay more than those who are accident-free for several years.
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