The Magic Number: Understanding Car Insurance Rates

You just bought a new car, and now you’re searching for affordable auto insurance. Once you supply an insurance company with some information, including the make and model of your car, your age, your address, etc., they give you a quote for your monthly premium. But how exactly do they calculate that number?

Read on to learn how insurance companies determine your rate and how you can save money by shopping around.

Different companies, different rates

Many drivers mistakenly believe that insurance rates are set by the state. While auto insurance companies must follow certain laws when calculating rates, the rates themselves are not set by law.

When you ask for a quote, the insurance company considers many different factors as they figure out your rate. However, because each insurance company uses their own unique calculation method, you may receive widely varying rates from different insurance providers.

Crunching the numbers

Depending on the laws in your state, insurance companies typically determine your rate based on some or all of the following factors:

  • The year, make, model, body type, engine size and safety features of your car
  • Your age and gender
  • Your marital status
  • Your personal credit history
  • Your driving record
  • Your usage of the car (such as if you are using the car for work, pleasure or as a collectible.)
  • Home ownership status and occupation
  • How many drivers will be using the car and their ages
  • How many vehicles you own
  • What kind of coverage limits you want
  • Where you live
  • Your weekly, monthly or annual mileage

Generally, your insurance agent will enter all of this information into a computerized system. The system automatically places you into a price group based on your personal information. The insurance company then subtracts any discounts for which you qualify from your group’s rate and you’re left with the resulting quote.

Where your money goes

If you think the quote is fair and decide to purchase a policy with the auto insurance company, you’ll start paying a monthly insurance premium. But what exactly does your monthly premium cover? Here’s a typical insurance premium breakdown:

  • About 70 percent of your premium pays for losses and loss expenses
  • About 26 percent of your premium goes toward marketing, commissions and administrative costs
  • About 4 percent of your premium contributes to the insurance company’s profits

You better shop around

Each insurance company has differing sets of claim payments and expenses, and they set rates for each “price group” accordingly. That’s why you’ll likely receive varying quotes from each insurance company. This is why it’s so important to take the time to shop around and find the best rate.

Plus, while insurance companies are prohibited by law to calculate rates based on race and religion, they are allowed to consider your age, gender and marital status. However, each company places emphasis on different factors. For example, while one insurance company may place more weight on a driver’s gender, another company may think their driving record is more important.

This is yet another reason to request plenty of quotes before you settle on an insurance company. In addition to the rate, you should also consider which company offers the type of coverage you desire. Do your homework and find the best fit for your unique auto insurance needs.

About Brian Hendricks

Brian Hendricks is the President of Fidelity Insurance Group. Brian started Fidelity in 2003 with 0 clients. Today Fidelity Insurance Group is a Premier Independent Insurance Agency in Florida with over 3,000 families and businesses insured. Brian currently serves on advisory boards for 2 of the largest property insurance companies in Florida. Knowlege, Integrity, and Committment are his and his agency's guiding principles.
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