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How auto insurance companies calculate the premium for your car?

Updated on August 23, 2010
Get auto insurance quotes online for additional discounts and savings before taking your new car insurance policy.
Get auto insurance quotes online for additional discounts and savings before taking your new car insurance policy.

Calculating the insurance premium of your car involves many factors to be taken into account before determining your insurance premium, so this can be confusing sometimes. Calculation of insurance premium has remained a mystery for some and solving this mystery has become an important thing for many new auto insurance buyers. Now, let us see what is the mystery behind your complex auto insurance policy plus what are the things insurance companies look for before calculating the premium for your car.

Auto insurance premium varies greatly from policy-to-policy and from one individual to another. In order to better understand how to calculate our car insurance premium, let us start with some basics.

What is an insurance premium?

The insurance premium is the amount you have to pay to your insurance company to cover everything you require so that your auto insurance policy remains in force for a year. This premium amount is calculated by taking into account various variables and factors, which involve certain criteria like the policy or package you are going to choose which is the most important point plus more options you are going to choose and if your car insurance coverage is broader, then the premium will be higher. The specific coverage limits also affect the premium.

Your Car = Your Needs

Your auto insurance premium reflects the model, the year, and the type of car, the number of cars you have insured or you are going to insure and number of drivers of your car insured in your policy for example if it is a family car, then you add wife, son, daughter including yourself. It is important to note that the premium can increase if you will add a teen driver which is a risky factor due to young age and sudden passion of driving teens have.

Coverage limits

Your coverage limit means the total dollar amount that your insurance company will have to pay in case there is a car accident and you submit a claim for covering damage caused to your vehicle. This in the terminology of insurance means any type of damage covered by your auto insurance policy.

If your auto insurance coverage is broader than the higher will be your coverage limits, but in general you have to pay a higher premium for this coverage (usually people pay lower premiums if they reduce their coverage limits). Before opting for coverage, talk to your auto insurance agent who can guide you with this plus can help you save money.

Deductible

The deductible is the amount of money auto owners agree to pay in order to file a claim covered by their policy.

Now lets take an example that after a car accident a car owner’s amount of claim costs around 1,500 dollars. If his/her deductible is 500 dollars, he/she has to pay the first 500 dollars and his/her insurer has to pay the remaining 1,000 dollars to fix his/her car. Moreover, if damage value is 500 dollars or less, the car owner has to pay all the cost, as these are less than his/her deductible, so if a car owner’s deductible is less, he/she will spend less money and the insurer will have to cover a greater part of share of the cost of repairs after an auto accident, so a lower deductible means that car owner’s premium will be more expensive to compensate for the increased coverage. Similarly, if a car owner’s deductible is up, his/her premium will fall.

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Driver’s History

Your driving record lying with the Department of Motor Vehicles is just like your resume behind the wheel. Your driving record lying with DMV allows your insurance company to go through your record as a driver and can have a definite impact on your auto insurance premium. Visit my previous hub - How does deductibles affect auto owners insurance premium? for more details regarding driver’s history and other factors which affect your auto insurance premium.

In many states, when insurance companies evaluate your driving record, they review your driving track record for the last 3 years and if there are any accidents that might have happened in this period, they investigate further 60 months (5 years). A clean record driver enjoys benefits of paying lower premiums and is eligible for several discounts just because of being a responsible driver.

Furthermore, if your driving track record includes accidents, violations of traffic rules, or insurance claims for damages during the time period, which is reviewed, the insurance companies can charge you a higher premium in order to cover additional risks involved with an unsatisfactory record.

How an insurance rating or score is calculated?

Beyond the specifics of your policy, one of the most important factors to determine your auto insurance premium is your individual insurance score, which is based on the information provided in your credit report that means you also need to maintain a good track record of paying insurance premiums of other policies you have taken in your lifetime. An individual’s insurance score comes out excellent with good track record, which is by paying insurance premiums on time, and there are no ECS bounces. If you have low probabilities of loss of insurance, these things enable the company to repay insurance with lower premiums.

Some other factors which help determine your individual insurance score include, debt and outstanding balances, long term relationships with lenders, a small number of newly opened accounts, and a limited number of requests to increase your credit or to obtain additional credit.

The insurance ratings or scores also include other factors like lawsuits for unpaid debts, bankruptcies, and unfulfilled legal obligations. The insurance companies evaluate all these variables in detail before generating an auto insurance policy for you.

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    • soni2006 profile imageAUTHOR

      Rajinder Soni 

      8 years ago from New Delhi, India

      Yes Joe, you are right because most insurers will insure your car for its current market value and premium will also be affected a little bit. How, read on... You may know that when you buy a new car, it loses up to 10 to 15% of its value once it has been driven out of the showroom. This also means that you need to take into consideration frequent depreciation in value of a top of range car or a luxury model. At the same time, your older cars will not affect the premium so much because their depreciation in value is less rapid than new ones.

    • profile image

      joe 

      8 years ago

      Does the market value or the value at which you bought the car affect the premium?

    • profile image

      Meghana 

      8 years ago

      This article was informative. I am doing a decision support model on auto insurance. I was wondering if there are any formula sets available to calculate the risk. I am just assuming i need to pay a base rate of x dollars and depending on factors like driving record, credit history this base rate will go up or remain the same. Hence the ideal candidate would have to pay x dollors only. Do you think its a right way to start ? I would appreciate your response! Thanks!!

    • soni2006 profile imageAUTHOR

      Rajinder Soni 

      8 years ago from New Delhi, India

      Thanks for that link Rich Preisig. I will have a look at your site.

    • profile image

      Rich Preisig 

      8 years ago

      This is a quite an informative lens and hope to someday speak with you, as our program may be able (quite likely) pay you more than you're receiving now to settle consumers debt. With that said, for those of you looking for more information on offering your clients the option of settling their debt with the attorney based debt resolution program that is offered in 48 states and pays debt resolution affiliates an accelerated payout, please visit www.DebtSettlementAffiliateSsearch.com for more information.

    • soni2006 profile imageAUTHOR

      Rajinder Soni 

      8 years ago from New Delhi, India

      That's totally right psychicdog.net. That gorgeous girl will not let you go in that car without climbing over her and she will stop you and get your auto insurance policy not only sorted but evaluated and reviewed also. So go ahead and best of luck.

    • psychicdog.net profile image

      psychicdog.net 

      8 years ago

      great hub. Thanks Soni2006 and the pic of the girl in front of the car. You couldn't get back in your car without climbing over her. Right? And she's going to stop you and get your insurance policy sorted first. Is that right?!

    • soni2006 profile imageAUTHOR

      Rajinder Soni 

      8 years ago from New Delhi, India

      That's why I tried to solve the mystery of how auto insurance companies calculate the premium of our cars. Thanks a lot for reading this article and your comment Veronica.

    • Veronica Allen profile image

      Veronica Allen 

      8 years ago from Georgia

      I've always been somewhat clueless as to how they calculate these premiums. This is the first time I've really understood it, Thanks.

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