Jessica Sautter is a Content Writer for CarInsuranceCompanies.com with a Bachelor’s Degree from Eastern Michigan University in Elementary Education with a Major in Reading and a Minor in Mathematics.

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Chris Harrigan has an economic degree from Limestone College and an MBA from Clemson University. He previously managed auto insurance claims for Enterprise Rent-A-Car. Currently, he is using his business and insurance expertise to provide insurance data analysis and visualizations to enhance the user experience.

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Reviewed by Chris Harrigan
Former Auto Insurance Claims Manager

UPDATED: Sep 29, 2020

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Here's what you need to know...

  • A car insurance premium is the total cost that you pay an insurer to receive a specific amount of coverage
  • While every company has a gross rate that must be approved by the Department of Insurance, final premiums that are quoted to consumers are based on several different personal factors
  • Some of the personal factors that affect your premium include: driving behaviors, driving experience, vehicle type, vehicle safety features, and vehicle usage
  • If you want to maintain your coverage, you must pay your premiums by the due date or coverage will be canceled for non-payment
  • Individual premiums are calculated based on the type of coverage you want and the amount of coverage you want

If you’re shopping for car insurance, you’ll find that just about every company in the industry is eager to give you a price quote.

The quotes that you decide to solicit are estimates that show you how much you’ll pay for auto insurance if you buy coverage through the insurer and all of the information that you provided is 100 percent accurate.

When you apply for insurance, the company will accept your application and underwrite it. Once the company has reviewed your records, they will send you a document that shows your final premium for the insurance term.

The premium is how much you pay to maintain car insurance through your carrier. Here’s what every consumer needs to know about auto insurance premiums and how they are determined.

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Table of Contents

Auto Insurance Premiums Are Not Negotiable

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You can walk into a car dealership ready to negotiate pricing, but don’t expect an insurance agent to haggle. The auto insurance industry is highly regulated by the Department of Insurance and the National Association of Insurance Commissioners.

These regulatory bodies have made it abundantly clear that all rates must be approved before the insurer can charge them. While some insurance advertisements might claim that you can negotiate your rate, you can’t.

If a company were to negotiate a rate, they could be fined or stripped of their license.

All licensed insurance companies are required by law to charge each and every policyholder premiums based on the rate that’s already been proposed and approved by the state.

If you were able to shoot over an offer and have it approved, there would be no way for regulatory officials to keep rates fair and competitive.

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Understanding How Insurance Rates are Made

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Insurance rates and premiums are two different things. While the terms are frequently used interchangeably, a rate is a price per unit of insurance that is charged to all policyholders who purchase insurance through a carrier.

A premium is more personalized because it is the rate multiplied by the exposure units.

When rates are being made, the insurance company will hire actuaries to do research on how much the company needs to charge to pay for losses and other related expenses.

The cost that is estimated to cover losses and other expenses is called the pure premium. The pure premium is then loaded with costs to cover sales expenses while still allowing for profit. The final rate is called the gross rate.

After a company uses studies to propose a pure premium and the gross rate, the rate is used to estimate how much each individual applicant needs to be charged.

Once the loading has been multiplied by the gross rate, the policy premium will be calculated. The loading per exposure unit is based on how much risk a client presents.

What risk factors are used to calculate your premiums?

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Now that you know how rates are made, it’s time to learn how your premium is calculated. When you get quotes for auto insurance, the carrier already has their rates and the charges for exposure units set.

The rates are then personalized when you are asked for your personal information, vehicle information, and driving behaviors. It’s important that you understand how your premiums are determined before you compare how much you and your best friends pay.

Your rates could be dramatically different, even through the same carrier, because everyone’s rating factors are different.

Here are some of the many risk factors that are used to calculate your personal car insurance premium.

Age

Age plays a major role in auto insurance premiums because younger drivers tend to have more serious losses than more experienced drivers.

While some states only allow companies to use years of driving experience versus the applicant’s age, at the end of the day being a teen driver will cost you more than being a middle-aged driver.

Gender

Age and gender are typically tied to one another. Women are statistically better drivers than men. You might not agree with the statistics, but actuarial studies show that women file fewer claims, especially younger women who are inexperienced drivers.

Driving History

Your age and gender can affect your premiums when you have a clean record, but having blemishes on your motor vehicle record can push your insurance costs up even more.

You might not see why moving violations are relevant, but they are. Having an infraction doesn’t cost the insurer money, but it makes you a bigger risk.

Since violations signify that you are guilty of disobeying the rules of the road, the trends show that you’re more likely to have a loss after a citation.

If you can, complete traffic school, so your infractions don’t show on your record. If they do show, the insurance company can surcharge your rates for up to three years. You could even lose discounts.

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Accident History

Your accident history can also affect your rates. Insurance companies are free to surcharge your auto insurance rates for up to five years after you have a loss.

In some cases, even non-fault accidents can affect your premiums if you have too many of them.

Vehicle

The year, make and model of your vehicle will all have an impact on your rates. Some people assume older vehicles cost less to insure, but that’s not the case.

The rates are based on how much damage is sustained when a car is in an accident and how likely the vehicles are to cause bodily injury. If a car has a bad safety rating, the car will have higher rates than average.

If your car has special features that help to limit the likelihood that the driver will have a loss, the rates may go down. Companies also factor in the average cost of repairs and parts when assigning a rate to a specific model. Cars that tend to get in a high rate of accidents come with higher premiums.

Driving Habits

Did you know that your commute can have an affect on your rates? If you work thirty miles away from home, you’ll pay more than someone who works right down the block.

How much you drive and the purpose of your trips will affect your rates. Drivers who ride around for pleasure tend to pay less than commuters and business drivers.

Credit Rating

In some states, carriers are legally allowed to check your credit-based insurance score when calculating your rates. The purpose of using your credit rating is to determine how likely you are to file a claim.

If you have defaults and collections, you may be more likely to file a claim when you have a loss.

How You Can Keep Your Premiums Low

You can’t negotiate your premiums, but you can shop around for coverage to find the lowest rates. The best way to keep rates down is to qualify for discounts. If you compare rates, and you are eligible for discounts, you could drive your rates down significantly.

If you are ready to shop around, make sure you get quotes from at least five companies before you assume that one company is offering the best rates. Contacting each company directly can be inconvenient.

If you want to price shop efficiently, use our FREE online rate comparison tool and you will be able to get a handful of instant quotes in just a few minutes. Enter your zip code below to get started!