Understanding Factors Affecting Auto Insurance Premiums

There are a number of factors that determine the cost of auto insurance premiums. These include the type of vehicle, the driver's age, gender, location, and driving record. The likelihood of a claim being made is a key consideration for insurers when setting premiums. For example, younger and less experienced drivers are more likely to be involved in accidents, so insurers will typically charge more if teenagers or young people below the age of 25 drive the car. Similarly, male drivers tend to be involved in more accidents than female drivers, so male drivers usually pay higher premiums. Other factors that affect premiums include the driver's credit history, the type of insurance coverage, and the amount of deductible.

Driving record

A driving record is a record with the department of motor vehicles (DMV) that stores your personal identification, license information, and any tickets or other infractions. It follows you from the day you get your license until you stop driving.

Your driving record has a direct impact on your auto insurance premiums. The better your record, the lower your premium. If you have a history of accidents or serious traffic violations, you will likely pay more than someone with a clean driving record. Even a single minor violation can increase your insurance premiums by 10 to 15%. A speeding ticket can bump your rates by 20%, while a reckless driving charge or a DUI can increase your premiums by 30% to 300%.

Insurance companies typically look back at your driving record for the past three years when you submit your application for coverage, and some check as far back as seven to ten years. They usually run a check on your driving record when you apply for a new policy and when it's time to renew your policy, which is generally every six or twelve months.

In addition to affecting your auto insurance premiums, your driving record can also impact your life insurance premium, credit score, career prospects, and even your right to vote. Therefore, it is essential to maintain a clean driving record by driving safely and responsibly.

Location

The location of the insured is one of the most important factors in determining auto insurance premiums. The location of the insured influences the likelihood of an accident, as well as the cost of the mishap. Higher claims translate into higher premiums.

Insurers use your address and ZIP code to set premiums because crime rates, population density, claims volume and frequency, and road conditions vary by region and city. These factors can all affect the possibility of filing a claim.

Urban vs Rural

Urban drivers almost always pay more than their rural counterparts due to higher rates of vandalism, theft, and accidents. The chances of being in a fender bender are much higher in an urban area than in a rural one with less-populated roads.

However, this is not a hard and fast rule. Some rural areas may have higher insurance costs due to a high risk of wildlife collisions.

State Laws

The minimum auto insurance limits that a state requires can also increase rates. Each US state has its own laws on coverage types and minimum limits. All but New Hampshire require liability coverage, though minimum requirements vary. Some states also require uninsured motorist coverage and personal injury protection (PIP), which can increase insurance costs.

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 with multiple policyholders can increase your premium to offset costs.

Crime Rates

Insurers also consider the type and frequency of claims filed in an area when calculating rates. Vehicle crimes like theft and vandalism drive up claim costs. People reported over one million thefts across the country in 2023, according to the National Insurance Crime Bureau. California, Texas, Florida, and Washington saw the highest car theft rates for the year.

Unemployment

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

Age

Teens are considered the riskiest drivers to insure. Drivers aged 16 to 19 get into almost three times as many fatal car accidents per mile driven as any other age group. Insurers frequently charge more to insure teen drivers to offset the higher costs associated with their claims. The cost of auto insurance for young adults is also relatively high, but it gradually decreases as they gain more experience behind the wheel. By the time a driver reaches their early 20s, the cost of insurance usually starts to drop, and by age 25, they may notice a significant reduction in their premiums.

As people continue through adulthood, provided they maintain a clean driving record and safe driving habits, their premiums will generally continue to decrease. However, as drivers reach their senior years, around age 70, premiums can start to increase again due to age-related factors such as vision or hearing loss and slower response times, which may make seniors more prone to accidents.

While age is a significant factor in determining insurance premiums, it is important to note that not all states permit age as a rating factor. For example, Hawaii and Massachusetts have banned the use of age in setting insurance rates, although Michigan does factor in years of driving experience, which can result in higher premiums for younger drivers.

Gender

The use of gender as a factor in setting auto insurance premiums is controversial. While some states have banned the practice, others still allow it. Insurance companies that use gender as a rating factor charge men more than women because men are statistically more likely to be involved in accidents, speeding, and DUI convictions. Men are also less likely to wear seatbelts and tend to drive more miles than women. According to Insure.com's rate analysis, female drivers between the ages of 16 and 24 pay around $500 less per year for car insurance than their male counterparts.

The impact of gender on insurance rates is most pronounced among the youngest drivers and varies by state. In some states, gender cannot be used to calculate premiums. Six states prohibit the use of gender as a pricing factor in auto insurance: California, Michigan, Montana, Oregon, Wyoming, and Washington D.C. In California, the Department of Insurance mandated that auto insurance companies operating in the state must eliminate the use of gender as a rating factor. Michigan's ban on gender came as part of an overhaul of its auto insurance laws, which also included prohibiting the use of marital status, home ownership, education level, occupation, ZIP code, and credit scores.

The debate about gender and auto insurance rates has been ongoing since the 1980s. Consumer advocates argue that using gender to set rates is discriminatory, while insurance companies maintain that it is a fair practice based on their actuarial research. As gender rights and equality issues gain prominence, more states may consider prohibiting the use of gender in setting insurance rates.

While gender can influence auto insurance premiums, other factors such as age, marital status, location, driving record, type of car, and credit score also play a significant role in determining rates. Age has a notable impact, with teen drivers generally paying the highest premiums. Rates typically decline when drivers turn 25, and drivers in their 50s and 60s tend to pay the least. Married drivers may also benefit from lower insurance rates due to perceived financial stability and the ability to bundle insurance policies.

Type of car

The type of car you drive is a major factor in determining the cost of your auto insurance premium. The make and model of your car can influence the cost of repairs, the likelihood of theft, and the safety of the vehicle.

The cost of repairs for your car is a significant factor in determining your insurance premium. Cars with expensive parts or specialised technology will be more costly to repair, leading to higher insurance premiums. Electric cars, for example, may be more expensive to insure due to the difficulty of obtaining and installing certain parts.

The likelihood of theft also plays a role in your insurance premium. Certain vehicles, such as luxury cars or sports cars, are more attractive to thieves, which increases the risk of theft. As a result, insurance companies may charge a higher premium to offset the potential costs associated with theft claims.

Additionally, the safety features and overall safety record of your car are important considerations. Vehicles with advanced safety equipment may qualify for premium discounts, as they reduce the risk of accidents and injuries. On the other hand, cars with a history of safety issues or poor crash test ratings may have higher insurance premiums due to the increased potential for damage and injuries in an accident.

Furthermore, the size and body style of your vehicle can impact your insurance premium. Larger vehicles, such as SUVs and vans, may be seen as safer and less likely to sustain severe damage in an accident, resulting in lower premiums. In contrast, sports cars and coupes are associated with faster speeds and riskier driving behaviours, leading to higher insurance rates.

It's important to note that insurance companies may also consider the cost of replacing your vehicle in the event of a total loss. More expensive cars will typically lead to higher insurance premiums to account for the greater financial risk undertaken by the insurance company.

Frequently asked questions