How Do Insurance Companies Calculate Quotes?

If you've started shopping around for the best auto insurance package, you may have wondered how insurance companies calculate your quote. Every insurance company uses their own formula for calculating rate quotes, and will take several factors about you into account. In almost all cases, the type of car you drive and your age or driving history hold the most "weight" when it comes to determining your insurance premium. High-end cars and sports cars that have a high risk of getting stolen command higher insurance rates. Young, inexperienced drivers tend to pay higher-than-average rates because they are considered to be "high risk" drivers.

Here's what you need to know about your insurance company's rate quote calculation process:

Methods Used to Calculate Quotes

Car insurance companies typically use a company-developed formula when calculating the rate quote, but they may use one of two basic methods to establish the base premium for your vehicle. The first method takes into account the make and model of your vehicle, vehicle safety rating and general statistics about your car being involved in a crash. The second takes into account the current fair market value of the vehicle, and the company will use their own method for determining what this fair market value actually is. Keep in mind that these methods may also be used only to calculate the base premium for your insurance policy. The insurance company will then factor in several other items to determine your actual insurance premium cost.

Factors that Affect Insurance Rates

Insurance premiums are generally broken down by percentages of different factors, or a point system. Some insurance companies use a higher percentage or allocate more points to certain criteria such as the driver history, your credit rating, car safety ratings and where you live.

Your insurance company may consider some or all of the following factors when calculating your insurance rate:

Your age. Drivers under 25 years of age typically get a higher rate quote than those who are older and have more driving experience.

Your driving track record. Speeding tickets, DUIs and car accidents on your record will all have an effect on your insurance premium.

Your neighborhood. If you live in a high-crime area, you will be paying a high insurance premium because there is a risk your car may be stolen or vandalized.

Car safety rating. If you're driving a car with a low safety rating, you do run the risk of being in an accident.

Your vehicle's make and model. The type of car you drive will affect your insurance rates. A brand new luxury sports car may be more likely to be stolen than a used, economy car. Keep this in mind if you are in the market for a new car and are interested in saving money on your insurance policy.

Your history with the company. If you are a longtime customer in good standing, or have other types of insurance with the same company, you may be eligible for a loyalty discount or other discounts that would lower the cost of your premium.

Sources:

CarInsuranceRates.com -- How are Auto Insurance Rates Calculated and How to Get Low Quotes

Kanetix.com -- How Do Car Insurance Companies Calculate the Rates they Charge?

GoInsuranceRates.com -- How Exactly is Your Auto Insurance Premium Calculated?