How Exactly is Your Auto Insurance Premium Calculated?

For many years, the insurance breakdown for auto coverage has been a mystery. Most policyholders have no idea how their costs are calculated and what exactly they are paying for. Some think that the real breakdown is kept a mystery by companies so that they can charge what they want without being questioned.

However, in recent years, the auto insurance costs charged by insurers have come under fire by various consumer advocates and even state legislators, while others have fought against practices of determining rates that they have been deemed unfair. To help demystify how rates are determined, let’s look at what helps in determining rates, as well as how premiums are calculated by breaking them down into percentages.

What Goes Into Determining Your Auto Insurance Premium?

Depending on who you ask, just about anything could go into determining your auto insurance expenses. But here are some of the main factors that are said to go into determining your auto insurance premium:

  • Your age: If you are under 25 years old, there is a good chance that you will have to pay more for your auto insurance coverage.
  • Driver history: If you have a bad driving history (tickets, accidents, DUIs, etc.), you might expect to pay more for your policy.
  • Vehicle type: The type of vehicle you drive can play a major role in your coverage amount. If you drive a gray economy car, your premium will most likely be lower than the person driving the fire engine red sports car.
  • Credit rating: While many consumers and legislators fight this practice, some insurers (depending on the state) are allowed to determine your rate based on your credit score.
  • Where your live: Some people find that if they live in a populated area with a high-crime rate, they will likely pay more for coverage because of the heightened risk of theft.
  • Car safety rating: While many insurers will deny they use a safety rating when determining car insurance rates, they do admit that they look at a vehicle’s accident potential, which could be determined by looking at the rating.

Calculating Percentage Breakdowns

Unfortunately, when you purchase an auto insurance policy, the above factors are not listed anywhere as determining factors. However, one must assume that the myriad of questions asked along the way (age, city, driving record, social security number, marital status, education level, etc.) in addition to the vehicle year, make and model must play a role in the premium quote you receive.

To get an idea of what seems to be important to the insurance company when deciding our premiums, let’s take a look at what goes into policy quotes from Progressive Direct.

Since we know that the types of cars we drive play the biggest role in insurance costs, we wanted to take a closer look at how insurance companies view other scenarios that were easy to calculate without Social Security numbers – in this case, age.

To acquire the policy quote, we created the scenario of a 35-year old single, suburban woman driving a 2009 Nissan Maxima (15 miles to work with policy limits of $100,000 for injury liability for one person, $300,000 for all injuries, $50,000 for property damage in an accident and $500 collision/comprehensive deductibles). Her quote came to a total six-month premium of $870.

Here is a breakdown of this policy by dollar amount and percentage:

Coverages

Coverage Costs

Percentage of Total Cost

Bodily Injury & Property Damage Liability

$336

38.62%

Uninsured Motorist Bodily Injury

$11

1.26%

Comprehensive Deductible

$178

20.46%

Collision Deductible

$345

39.66%

When using the same driver’s details, yet changing the age to 23, the total for the policy came to $999.00. Here is a breakdown of this policy:

Coverages

Coverage Costs

Percentage of Total Cost

Bodily Injury & Property Damage Liability

$386

38.64%

Uninsured Motorist Bodily Injury

$9

0.90%

Comprehensive Deductible

$207

20.72%

Collision Deductible

$397

39.74%

In both examples, you can see that collision coverage was a slightly bigger concern – a sign that the more expensive the vehicle, the higher the repair/replacement costs and thus, the higher the deductible costs are likely to be in comparison to the liability costs.

But it also seemed that being a younger driver significantly increased collision deductible costs, possibly because younger drivers have greater reckless driving reputations.

To dig a little deeper, we looked at zip codes and driving records for the driver.

After making some zip code adjustments, we found that living anywhere in the same metropolitan area merited the original $870 rate. However, by adding a DUI to the originally clean driving record of the 35-year-old, the collision cost jumped to $412, 42.82% of its $962 total.

What’s interesting is that though the collision coverage for the DUI driver jumped above that of the younger driver, the total cost is $37 less than the younger driver with the clean record.

Reports have always shown that younger drivers pay more for their coverage, but from these examples, it is obvious that being a younger driver with a clean record is seen as more of a threat than living in dangerous neighborhoods or being an older driver with a seriously-blemished record. Interesting.

Why Some Are Switching to PAYD

If you’re tired of trying to figure out how insurance companies are determining your premiums, you might consider Pay-As-You-Drive insurance like Progressive’s MyRate. With this type of coverage, instead of looking at your age, past driving record or credit score, your costs are determined by how many miles you drive.

While this type of insurance could take the mystery out of how you’re being charged, some don’t like that the coverage requires your car to be be traced via a tracking device to watch mileage. Also, while your past driving record may not be a concern, your current driving record could become a cost problem.

It’s interesting to know that numerous variables – some out of our control, some not – play major roles in how auto insurance companies are calculating our premiums. It seems that figuring out auto insurance premiums is as vexing as determining the calculations behind a credit score.

Unfortunately, we may never receive full disclosure from auto insurance companies as to how we’re being charged, so it seems our best line of defense is just to shop around for the best auto insurance rates we can find.