What Determines the Price of Auto Insurance?
Updated: Mar 26, 2020
In 2019 there were over 284 million registered vehicles on U.S. roads–that's a lot of vehicles to insure! And yet, a staggering 13% of motorists–one in eight people–drove without auto insurance. Driving uninsured is treading on dangerous ground. But for many, cost is the primary concern. So what determines the price of auto insurance and how can you save?
Read on to get the inside scoop.
Also called a Motor Vehicle Report, your driving record is probably the most obvious factor behind the cost of auto insurance. The amount and severity of accidents you’ve been involved in and how many traffic violations you’ve racked up can spike your premium. And although getting a license is an exciting step toward independence, new drivers lack an insurance track record and pay more as a result.
How to save: Improve your driving record and safety habits. Both will help you do what is in your power to minimize or avoid chargeable accidents.
MAKE AND MODEL
A vehicle’s make, model, style, and repair or replacement cost are also key factors. Driving a sports car or a vehicle with costly parts will inevitably increase insurance rates, especially if it has a higher likelihood of theft. Comprehensive and collision coverage insures a vehicle up to its Actual Cash Value (ACV) in the event of theft or a total loss.
How to save: If you can, drive an economical vehicle. Choose one that has a high vehicle safety rating and is equipped with the newest safety features.
There’s a much greater chance of an accident during the rush hour commute than there is while enjoying an occasional joy ride around town–naturally, the commuter pays a higher rate. How a vehicle is used affects both the risk of a crash and the cost of insurance.
How to save: If you’re a nine-to-five worker, you can’t avoid rush hour. But you can keep up to date with weather and traffic conditions. Knowing what to expect on your journey before you hit the road prepares you to drive accordingly, which can make you less likely to cause an accident. Regular vehicle maintenance will also enable the best performance, even in less-than-ideal driving conditions.
It’s only logical that frequent driving makes you more susceptible to accidents. So it makes sense that insurance companies take your annual mileage into account when pricing your policy.
How to save: Where possible, drive fewer miles. Take advantage of carpooling, biking, or public transportation to reduce your vehicle’s annual mileage.
Where you live impacts your exposure to potential theft or accidents. Drivers who live in highly populated cities face heavy traffic congestion and higher rates of vandalism, theft, and accidents. Meanwhile, small-town, rural drivers deal with much less risk. High-risk neighborhoods pay higher premiums.
How to save: If you’re thinking about moving into a new area, check with your agent about factors that determine local auto insurance rates.
Insurance companies love statistics, and with good reason: they're produced by factual data. Drivers 25 and younger–especially teenagers–automatically pay more for auto insurance than mature, experienced drivers. It’s a fact that youngsters are much more likely to get into an accident. However, there are student driver discounts.
How to save: If you’re in high school, we recommend that you take advantage of student discounts available to you. Maintaining a high GPA and taking a driver’s education class are two ways teens can save.
The Insurance Information Institute plainly states: “Women tend to get into fewer accidents, have fewer driver-under-the-influence accidents (DUIs) and—most importantly—have less serious accidents than men. So all other things being equal, women often pay less for auto insurance than their male counterparts.”
How to save: If you’re a woman: do your thing, girl. If you’re a man: step your game up.
The Fair Isaac Corporation (FICO)–creator of credit score software–reports that about 95% of auto insurers use credit-based insurance scores to predict how likely a consumer is to file a claim. Studies have repeatedly shown that people with lower credit scores get into more accidents with higher claims payout. The more it costs for an insurance company to cover you, the more expensive your policy will be.
How to save: Remember: higher credit score = lower insurance premium.
POLICY AND DEDUCTIBLES
In general, a higher deductible means a lower monthly payment–the opposite is also true. Though extra coverage gives you added protection, expect it to increase your monthly insurance costs. Another thing to keep in mind: most insurance companies offer discounts for customers who purchase multiple products, such as home and auto bundles.
How to save: Increase your deductibles (especially if you have a long track record of accident-free driving) and lower your maximum coverage limits. Consider bundling your home and auto insurance for extra savings.
GAPS IN COVERAGE
Whatever you do, NEVER lapse in your coverage, even for a short period of time. Having gaps in coverage makes you riskier–and pricier–to insure.
How to save: Always have an auto insurance policy, without any gaps. Stay on top of payment due dates by setting reminders in your calendar. Or better yet, use autopay so you’re guaranteed to never miss a payment.
Each state has its own rules on what factors can and cannot affect how much you pay for auto insurance. For example, while one state may ban the use of rating factors such as credit score when determining price, another state may use them heavily.
How to save: Talk with your agent about how your state regulates auto insurance prices and what savings opportunities are available to you.
An insurance company also uses its own claim history and data to determine rates. Since those factors vary by insurer, so will premiums.
How to save: Consult with your agent on this, or find one willing to help—of course we'd be happy to assist!
The Bottom Line
You can’t change your age or the state regulations on insurance pricing. But you can control key cost factors such as your driving record, the make and model of your car, what you use it for, how many miles you drive, and your credit score. If you’re trying to save on auto insurance and feel overwhelmed, have no fear—your independent insurance advisor agent is here!