Understanding Auto Insurance: Factors That Increase Your Premium

Introduced in the 1990s, auto insurance scores are used by insurance companies to predict the likelihood of future claim filings and determine if an applicant should be granted an insurance policy and at what rate. These scores are based on information from credit reports, including payment history, credit history length, credit mix, and pursuit of new credit. A higher score generally predicts a policyholder will have fewer accidents and claim filings, leading to lower rates, while a lower score can result in higher rates or even denial of coverage. While auto insurance scores are not directly tied to credit scores, improving one's credit score and financial responsibility can positively impact their auto insurance score.

Credit history

• Payment history: Paying your bills on time is crucial for maintaining a good credit score. Late payments or credit delinquencies can negatively impact your score and signal to insurers that you may be a higher-risk client.
• Outstanding debt: The amount of debt you currently have is another factor considered by insurers. It's important to manage your debt effectively and reduce it where possible.
• Length of credit history: The longer your credit history, the better it is for your insurance score. Maintaining long-standing credit accounts can positively influence your score.
• Credit mix: Insurers also look at the different types of credit you have, such as auto loans, mortgage loans, and credit cards. Having a diverse credit mix can demonstrate your ability to handle various credit responsibilities.
• Credit utilization: This refers to how much credit you're using relative to the total credit available to you. It's recommended to keep your credit utilization below 30% to maintain a good credit score.
• Number of credit inquiries: Each time you open a new credit account, such as a credit card or take out a loan, a credit inquiry is made, which can impact your score. Too many hard inquiries in a short period can negatively affect your credit score.

Improving your credit score in these areas can lead to a better auto insurance score and, consequently, more favourable insurance rates. It's worth noting that some states, such as California, Hawaii, Massachusetts, and Michigan, have banned or restricted the use of credit history in calculating insurance rates. Therefore, it's always a good idea to check with your state's insurance regulations to understand how your credit history may impact your auto insurance.

Previous claims

The impact of previous claims on your insurance score and rate depends on several factors, including the nature of the claim, the time elapsed since the claim, and whether you were at fault. For example, at-fault claims typically lead to higher insurance rates than claims where you were not at fault. Additionally, the more recent the claim, the greater the impact on your current premium. If you have a history of frequent claims, insurance companies may view you as a high-risk driver, resulting in significantly higher insurance rates.

It's worth noting that not all claims are weighted equally. The details of the collision, such as who was at fault, your driving record, and the amount of the claim, can all influence how a claim affects your monthly premium. Moreover, insurance companies may request a Comprehensive Loss Underwriting Exchange (CLUE) report, which provides a detailed record of your claims history for up to seven years. This information helps them predict how risky it would be to insure you and set your insurance rate accordingly.

While previous claims can impact your insurance score and rate, there are ways to mitigate this effect. Improving your driving record by taking additional driver's education courses or maintaining a long period without any claims can help reduce your insurance premium over time. Additionally, shopping around and comparing quotes from various insurance providers can help you find more favourable rates, especially if you have an overall good driving record with no history of major insurance claims.

Accident history

Accidents will impact your insurance score, and by extension, your insurance rates. The impact of an accident on your insurance score depends on several factors, including the state in which the accident occurred, the nature and severity of the accident, and the insurance company.

In most states, an accident will affect your insurance rate for three to five years. However, the exact length varies by state and insurance company. Some states, like California, have a standard length of time that accidents remain on your driving record, while others, like Florida, base this on the type of accident. For example, in California, accidents generally stay on your record for three years, while DUI convictions remain for ten years. In Florida, accidents stay on your record for three to five years, while alcohol-related violations are tracked for 75 years.

The surcharge or additional charge applied to your insurance bill following an accident also depends on the accident's severity and the state's regulations. Some states only allow insurance companies to surcharge at-fault accidents, while others give discretion to surcharge any accident. The surcharge is often a percentage of your premium and may be higher for major accidents.

It's important to note that accidents don't always affect your insurance rates. If you weren't at fault or if it's your first accident, your rates may not change. Additionally, some states, like Massachusetts, prohibit or make it difficult for insurance companies to raise your premium if the accident wasn't your fault.

To lower your insurance rates after an accident, you can compare quotes from different insurance companies, adjust your coverage, or consider accident forgiveness or defensive driver discounts. Improving your credit score and reducing outstanding credit card balances may also help lower your insurance rates.

Driving violations

It is important to note that not all driving violations carry the same weight. For example, violations such as DUI (Driving Under the Influence) or multiple speeding tickets are considered more serious and will have a more substantial impact on your insurance score. Additionally, insurance companies may also take into account the number of violations and your overall driving record when determining your insurance rates.

While public driving records are generally not included in insurance score calculations, insurance companies will still take driving violations into account when setting your premiums. This means that any violations on your record, especially those within the last 10 years, can result in higher insurance rates, even if they are not directly factored into your insurance score.

Furthermore, your driving record, including accidents and claims, can also influence your insurance score and rates. At-fault accidents, in particular, are seen as a risk factor by insurers, as they indicate a higher probability of future accidents. Even not-at-fault accidents can lead to an increase in insurance rates in certain states, as insurers believe that some drivers are prone to such incidents.

In summary, driving violations play a crucial role in determining your auto insurance score and rates. The more violations you have, especially serious ones, the higher your insurance score and premiums are likely to be. Additionally, your overall driving record, including accidents and claims, contributes to the insurer's assessment of your risk level, which further influences your insurance costs.

Insurance claims in your area

Secondly, insurance companies use databases like the Comprehensive Loss Underwriting Exchange (CLUE) Report to gather information on auto and personal property claims. These reports contain data on the types and frequency of claims made in specific areas, which can influence the calculation of insurance scores and rates.

Additionally, insurance companies may also consider the impact of natural disasters or other location-specific factors when determining insurance scores. For example, a home insurer might factor in the risk of natural disasters in your area, such as hurricanes, floods, or wildfires. This information can contribute to their assessment of the likelihood of future claims being made in that region.

It is important to note that insurance companies use proprietary algorithms to calculate insurance scores, so the weight given to these factors may vary across different companies. However, it is clear that insurance claims in your area can influence your auto insurance score and, consequently, your insurance premiums.

Frequently asked questions