How Auto Insurance Rates Are Calculated

Have you ever got a quote for car insurance and thought, “Wow! This is so expensive!”? I can assure you, you are not alone! But, have you ever wondered what factors determine that price? If so, you have come to the right place. If you read this article, you will learn all the things that determine your auto insurance rates!

insurance risk

Car insurance companies are concerned about risk – the likeliness of an event occurring that they will have to pay for. For this reason, they are accumulating and analyzing a great amount of data about drivers. If they determine you are high risk, you will pay a high price. If they determine you as low risk, you will pay a low price. Now you are probably asking, “Okay… Well, what determines if I am high or low risk?” Here are a few factors that affect your auto insurance rates:

  • Having No Prior Insurance – If you do not have prior insurance coverage the insurance companies will rate you as a riskier driver because they have no way to rate your driving history.
  • Previous Accidents and Claims – Car insurers have found that drivers who have previous accidents or claims are more likely to have another in the future. In turn, they charge these drivers more. Drivers without a previous record are rated less because they are not as likely to file an accident or claim in the future. Accidents and claims are rated on a drivers’ record for about 5 years in Texas.
  • Age – Statistics show that drivers between the ages of 16-24 are higher risk. Because these drivers are statically proven to be less cautious on the road, they are charged a higher rate.
  • Location – Whether you live in a rural or urban area will affect your insurance rates. Urban areas are typically subjected to higher insurance rates because of population density, traffic congestion, speed limits, and traffic patterns. Insurers also look at the statistics of accident rates and the severity of the accidents. If the area you reside in is statistically proven to have high accident rates, this will reflect on your insurance rates.
  • Vehicle Usage – The number of miles you travel in your car will also play a factor in your insurance rates. If your car is used for business it will also be reflected in your rates. If a driver commutes 20 miles to work they are more likely to have an accident compared to the driver who commutes only 1 mile. Therefore, the driver who commutes the furthest would be rated higher.
  • Type of Car – The cost of your car is a big factor in insurance rates. Other factors include how expensive the car is to repair, its safety record, and the likeliness of theft. The most stolen vehicle for 2019 according to the Insurance Information Institute was the full-size Ford pickup!
  • Driving Record – Insurance companies may deem a driver unsafe if they have speeding tickets on their record. This will be reflected in your auto insurance rates. Speeding tickets are used to rate a customer for 3-5 years in Texas depending on the insurance company.
  • Credit Score – Insurance companies consider credit scores for drivers to predict insurance losses. They do a soft pull of the driver’s FICO score to determine what risk tier the they will be in. If you have poor credit you will be automatically put into the riskier tier. When in the riskier tier, you will have a higher rate. Your credit score is based on payment history, the amount borrowed, length of accounts, inquiries (not home or auto-related), and credit mix. If you are with an insurance company for two years and have poor credit, they will do another pull. If your credit score increases, they will use your new score to determine which risk tier you will be placed in. If your credit score decreases, you will remain in the same tier at renewal as long as you are with that same insurance company. If you switch companies, then that company would take your new score.

credit card insurance rates

Insurance companies file their rates with the Insurance Department for each state every year. This is when the risk tiers are determined that a driver will be placed into. The list of factors above is used to determine your tier. Whichever tier the driver falls in is the rate they will receive. This is why your insurance rate may be so different from that of your neighbors. Insurance rates differ from person to person, location to location, and even one insurance company to another.

Hopefully, this article has helped you better understand how your insurance rates are determined. Contact us for any questions or concerns you may have regarding your auto insurance rates!