Factors Affecting Auto Insurance Rates: 6 Key Elements

Auto insurance rates are determined by a multitude of factors, some of which are within the driver's control, while others are not. The six most significant factors that influence auto insurance rates include age, location, driving history, vehicle type, credit score, and coverage selections. These factors are used by insurance companies to assess the risk associated with insuring a particular driver and their vehicle, with the perceived risk level directly impacting the cost of insurance.

State requirements

State-mandated minimum insurance coverage varies across the United States. For instance, Alabama's minimum car insurance requirements are 25/50/25, whereas Iowa's are 20/40/15. Wyoming mandates 25/50/20, and Wisconsin requires 25/50/10.

The type of liability coverage that most states mandate is bodily injury liability and property damage liability insurance. Bodily injury liability coverage is typically represented by two numbers. The first number signifies the maximum coverage amount for a single person's medical expenses, pain, and suffering, or other necessary expenses resulting from a car accident. The second number indicates the total coverage limit for all injured parties in the same incident.

Property damage liability insurance, represented by the third number, covers the cost of repairing damage to another person's car and other property, such as utility poles, landscaping, livestock, and buildings.

Additionally, some states, known as no-fault states, require Personal Injury Protection (PIP) or Medical Payments coverage. PIP insurance covers medical expenses, lost wages, and other related costs for you and your passengers in an accident, regardless of who is at fault. Medical Payments coverage, on the other hand, only covers direct medical expenses and is usually mandated in states with less stringent insurance requirements.

Furthermore, some states, such as Michigan, mandate additional types of insurance. For example, Michigan requires property protection insurance (PPI), which covers damages to stationary objects like buildings, fences, and guardrails.

The cost of car insurance also depends on whether a state is a tort state or a no-fault state. In a tort state, drivers can sue each other for bodily injuries and property damage without restrictions. In contrast, no-fault states limit a driver's ability to sue, requiring them to rely on their insurance coverage, which can result in higher insurance rates.

Lastly, the frequency of lawsuits in a state can influence insurance rates. States with a higher number of lawsuits tend to have more expensive car insurance, as insurance companies pass on the cost of settlements to their customers.

Age and experience

The cost of auto insurance for teen drivers is substantially higher than for adult or senior drivers. Teen drivers pay, on average, $3,894 more than senior drivers annually. This difference in insurance rates is primarily due to teens being categorised as a high-risk group, making them more expensive to insure.

Age becomes less of a factor in rating insurance policies at the age of 20, and its impact diminishes further at 25. Auto insurance premiums reach their lowest point when drivers are in their mid-50s, before rising again for older drivers aged 70 and above.

In general, mature drivers have fewer accidents than less experienced drivers, particularly teenagers. Insurers typically charge more if teenagers or young people below the age of 25 are listed as drivers on a policy. After age 25, a driver's insurance rates start to decrease.

On the other end of the spectrum, senior drivers often see their insurance rates increase after they pass the age of 65. Older drivers are not only more likely to be involved in car accidents than younger adults, but they are also more susceptible to sustaining injuries in collisions.

Driving record

A driver's history is one of the most significant factors in determining their car insurance rates. The better your driving record, the lower your premium. Conversely, a history of accidents, serious traffic violations, or drunk driving convictions will result in higher insurance rates.

Insurance companies view a driver's past as an accurate predictor of their future performance. They will typically look at your driving record for the past three to five years, depending on your state. A history of tickets or violations will not only increase your current insurance rates but may also affect future premiums. For example, a speeding ticket can increase your insurance rates by 30%, and a DUI conviction can result in a surcharge.

The impact of driving records on insurance rates is particularly notable for new drivers. If you are a new driver without an insurance track record, you may pay higher rates as insurance companies won't have enough information to evaluate your risk. Additionally, new drivers over the age of 25 tend to pay more than their younger counterparts, as the number of years of driving experience also influences rates.

Maintaining a clean driving record can help you benefit from lower premiums and even safe-driver discounts. Conversely, multiple infractions or accidents on your record will result in higher rates and may even lead to your insurance company deciding not to renew your policy. Therefore, practicing safe driving habits and avoiding violations are essential to keeping your insurance costs down.

Location

Auto insurance providers look at multiple factors when calculating your car insurance quote. Your ZIP code and state can play a large part in what you pay for a premium. The minimum auto insurance limits your state requires can also increase your rates.

The state, city, and ZIP code you live in can increase or decrease your insurance rate. The factors that affect your car insurance premium include:

Frequency of Claims in Your Area

If people in your ZIP code file a lot of auto insurance claims, insurers may designate your neighborhood as high risk. To offset their own potential costs, car insurance companies will quote higher premiums in that ZIP code.

Population Density

The chances of being in a fender bender are much higher in an urban area than in a rural one with less-populated roads. Car insurance providers take this into account when calculating your premium.

Weather

Harsh weather like heavy rain, hail, or snow can lead to a higher chance of an accident. If you live in an area prone to flooding, the high potential payout that a car insurance company would have to make to multiple policyholders can increase your premium to offset costs.

Crime

If you live in a city or neighborhood with frequent incidents of vandalism or theft, your car insurance company will take that into account when they calculate your rate.

Unemployment

In areas with high unemployment, it is not uncommon for people to forgo car insurance due to budget restraints. Other policyholders in the same area wind up paying higher rates to compensate.

Road Conditions

Roadways in ill repair or with dangerous intersections up the odds of an accident happening, which results in higher car insurance costs.

Car insurance companies are concerned about where you live because it factors into how likely you are to file a claim on your policy. Higher numbers of claims tie directly into higher car insurance premiums.

This means that if you live in a state, city, or ZIP code that experiences a lot of auto accidents, auto insurers will have to pay out more for repairs or medical bills. It makes sense that your provider would want to charge more for a car insurance policy in those areas.

The opposite is also true. If you live in an area that doesn't see a lot of traffic or accidents, your annual car insurance premium should be lower.

Vehicle type

The vehicle type is a significant factor in determining auto insurance rates. The make, model, and age of a car influence its insurance costs. While luxury vehicles with advanced safety features are more expensive to insure, older base models with high mileage are cheaper. Sports cars are considered high risk and have higher insurance rates than minivans. The brand also matters; Dodge has the highest average insurance costs, while Mazda has the lowest.

The size and weight of a vehicle affect insurance rates as larger cars can cause more damage in accidents. Small cars, however, may have lower premiums as they pose less risk to other vehicles. Safety features like airbags, anti-lock brakes, and anti-theft systems can reduce insurance costs. Electric vehicles (EVs) are more expensive to insure due to higher repair costs and the lack of historical risk data.

The probability of a vehicle being stolen also impacts insurance rates. Certain models, like Hyundai and Kia, are targeted by thieves, leading to higher insurance rates. Additionally, vehicles with high-performance capabilities are linked to riskier driving behaviour and are thus more costly to insure.

When determining insurance rates, insurance companies use the Canadian Loss Experience Automobile Rating (CLEAR) system, which assigns scores based on the average cost per vehicle for claims, including crashes, theft, and property damage.

Frequently asked questions