Demystifying the Calculation of Car Insurance Rates

Written By: John Gaddy on January 11, 2010 No Comment

You just drove home a shiny new car, and it’s time to secure affordable auto insurance. Once you supply an insurer with some basic details, including the make and model of your car, your date of birth, your residential address, etc., they offer you a rate quote. But have you ever wondered how they calculate this number?

Below we review how insurance companies determine your premiums and how you can save money by shopping around.

Different insurers, different quotes

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 request a quote, the insurer reviews several factors as they determine your rate. However, since each company utilizes their own unique calculation method, you’re likely to receive widely varying rates from different insurance providers.

Running 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, model, body type, engine size and safety features of your vehicle * Your age, gender and marital status * Your personal credit history * Your driving record * Expected usage of the car (such as if you are using the car for commuting to and from work, pleasure or as a collectible.) * Home ownership status and occupation * Number of drivers that will be using the car and their ages * Number of vehicles you own * Requested coverage limits * Where you reside * Assumed weekly, monthly or annual mileage

Normally, your agent will key each of these items into a computer. The software automatically places you into a rate group based on your answers. The insurer then subtracts any discounts for which you are eligible and you’re left with the resulting quote.

Where does my premium go?

If you elect to purchase a policy with the company, you’ll begin paying a monthly premium. But what exactly does your monthly premium cover? Here’s a typical insurance premium breakdown:

* Almost 70% of your premium goes towards losses and loss expenses * About 26 percent of your premium goes toward marketing, commissions and other administrative costs * About 4 percent of your premium contributes to the insurance company’s profits

Be sure to 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 insurers are prohibited by law to calculate rates based on race or religion, they can consider your age, gender and marital status. However, each company places emphasis on different factors. For example, while one company may place more emphasis on a driver’s gender, another company may view their driving record are more important.

This is yet another reason to request numerous quotes before you settle on a particular company. Besides the rate, you should also consider which company offers the type of coverage you need. Do your homework and locate the best fit for your unique auto insurance needs.

If you’re looking for instant car insurance quotes or just a simple auto insurance quote comparison drop by 123insurancequotes.net today for more information. Save money in 60 seconds or less with our easy rating software.