How Auto Insurance Rates Are Calculated

How pricing works

Why rates are uncertain

Like all businesses, an insurance company must cover its costs to stay viable. However, the difference with an insurance company is that they do not know how much the product will cost.

An insurance company collects premiums to pay for insurance claims, administration, and taxes.

Claims are the largest expense for an insurance company. They pay for injuries and vehicle repair/replacement. Claims are also the most unknown expense at the time of purchase, making them difficult to predict and posing a significant risk to the insurance company.

How your rate is priced

To cover the high risk and expense of claims, an insurance company:

Considers the number of past claims when setting their base rate.
Uses premiums collected from all their policyholders to pay for the few who will make a claim.
Invests the money collected from policyholders to reduce financial risk.

Insurance companies use a formula based on several identified risks to determine the price of your auto insurance policy. These risks include where you live, your age, your vehicle type, how much you drive, and any past insurance claims.

What affects your rate

Insurance companies have access to significant amounts of data, such as personal characteristics like age, years licensed, and marital status, to predict the risk of you making a claim.

See what factors affect your rate

Base rate

What a base rate covers

A base rate covers an insurance company’s expected claim, operating expenses, and reasonable profit to ensure the company’s viability.

Surcharges and discounts

An insurance company might apply a surcharge based on any accidents or convictions you may have. You may also be eligible for several discounts or preferred rates depending on factors like: