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How is my car insurance premium calculated?

Your insurance premiums are calculated based on how much of a risk the insurance company thinks you are. But how do they come up with that number? The short answer is that there are hundreds of variables. On top of that, each insurance carrier uses a different algorithm. This can make it pretty tricky to predict what a client will pay before plugging in the information. However, we can ball park it based on some of the major rating factors listed below.

Insurance Score: The insurance score is one of the most influential variables when pricing your insurance. It is a number the insurance company gives you that is correlated with your credit score. Insurance companies use this number to predict how dependable and responsible you will be behind the wheel and when making payments.

Driving History: This one seems like an obvious one, but people still have a hard time believing they should be paying so much when they have multiple at-fault accidents and violations on their record. A person's driving record is the best way to predict how safe they will be on the road in the future. Insurance companies tend to look at violations and incidents within the 3 and 5 year mark. A temporary solution is purchasing "Accident Forgiveness" coverage to protect you from any premium increases that could result from accidents.

Driver's Age: It is no secret that young drivers are higher risks behind the wheel. Even though they only make up a fraction of the drivers on the road, they are responsible for a sizable percentage of the accidents. A young driver will usually have higher rates than their elders. 25 years old seems to be a common milestone for insurance rating purposes.

Vehicle: It makes sense that a more expensive car will be more expensive to insure, especially when Collision and Comprehensive coverage is included. Not only that, but if a certain type of car has a history of being in accidents, it will be rated higher. For example, sports cars are more expensive to insure because the driver is more likely to drive aggressively and is therefore a higher risk.

Garaging Address: If you live in an area with a higher crime rate, your premiums will be higher due to the risk of theft or vandalism. One common rule of thumb is if your garaging address is within the city limits, your premiums will most likely be higher.

Bundling Policies: Insurance companies love having a customer's entire portfolio of policies, and they will reward you for that. The multi-policy discount between auto and home can be as significant as 25%

Coverages: The higher coverage limits you have, the more expensive the premium. Some of the more confusing coverages are the Collision and Comprehensive where you select a deductible amount. The deductible being the amount you would pay out of pocket in order to utilize that coverage. Take for example an instance in which you run into a pole and cause $10,000 of damage to your car. You currently have a $1,000 deductible for your collision coverage so that means you would pay the first $1,000, and the insurance company would pay the remaining $9,000. Based on this example, if you had a $2,000 deductible, the insurance company would end up paying less which would in turn make you less of a risk, ultimately bringing your premium down. If you had a lower deductible, your premiums would be higher.

Even though these are some of the more influential factors when rating your premiums, it is important to note that there are many more.


Fenix Risk Management is an independent insurance agency proudly serving families & businesses in Georgia, Alabama, North Carolina, South Carolina, Tennessee, and Florida.

Vik is an adviser at Fenix Risk Management.

Note: the opinions expressed in this blog are that of the author, not of any other individual or organization referenced.

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