How Is Auto Insurance Calculated?

The Factors

At least five elements are used to calculate auto insurance rates: a base rate, a driver factor, a vehicle factor, a geography factor and a coverage factor. In most states, auto insurance companies can use other factors to determine rates as well. Each of these factors is combined to determine a final premium rate that the policy holder will pay for auto insurance coverage.
Because each policy holder's situation is different, auto insurance rates can vary considerably. A young driver with a new car can pay double or triple the rate paid by a middle-aged couple with a vehicle that is several years old.

Determining the Risk Factors

Driver risk factors are made up of calculations based on the driver's age, gender, marital status, history of accidents and moving violations. They can also include calculations based on the driver's credit history, although not all states permit auto insurers to base rates on credit.
Vehicle risk factors represent how much the insurance company will likely pay if the car is involved in an accident, based on the value of the vehicle. They can also represent the likely attitude and habits of the driver. For example, a sports car indicates the driver will likely drive faster and more carelessly, while a van indicates the driver will behave more cautiously.
Actuaries look at accident frequency and severity in specific locations to determine geographic risk factors. In general, cities are considered riskier areas for accidents, thefts and vandalism, while rural areas are considered safer.

Determining Coverage Factors

A coverage factor is based on the limit, or the total amount of coverage, the policy provides. A higher coverage limit represents a higher level of protection for the driver, but it also represents an increased risk for the insurance company. For example, if a driver carries liability limits of $25,000 per accident and causes $50,000 in injuries to another driver, the insurance company is only obligated to pay $25,000. If that same driver carries $50,000 in liability coverage, the insurance company would pay for the total cost of that accident.

Putting the Factors Together

All factors carry a numerical value that raises or lowers the premium. The insurance company starts with the base rate, which is a dollar amount that is the same for every policy. It then multiplies the base rate by the driver, vehicle and geography risk factors, as well as the coverage factor and any other factors approved by the state in which the policy is written. The end product is the amount the policyholder will pay for auto insurance coverage.