Many people who buy liability coverage for their cars wonder how the companies figure out the auto insurance price they charge consumers. If this is something you are wondering, you are not alone. It is one of the #1 questions that consumers ask of their agents when buying auto insurance for their cars.
It really is not that complicated. Each insurer has thousands of different rates in every state that it does business. They have rates for each type of car, model of car, each driver and every geographical area in that state. Plus each company also has its own set of fees and discount programs available and all these factors can and does influence the prices consumers get quoted for their liability coverage.
When pricing and then selling you a policy for your vehicle insurers and their agents have three basic goals in mind and these impacts the price they quote you on auto insurance estimates.
The 3 Basic Goals of Insurers
- Insurers need to make enough money to cover all their policyholders’ claims and at the same time still be able to pay their overhead expenses like staffing and electricity.
- In figuring out how much to charge you they look at your personal factors and driving record to see if you are in a higher risk class. For drivers in a higher risk category like under 20 they will charge a higher rate because the risk is higher than for say a 30 year old. When the risk is higher they pass the cost of the risk on to the person being insured, and conversely if the risk is lower than that person will get a lower rate.
- At the same time they want to charge a competitive rate and not charge you too high a price that you will then choose a different carrier.
Price is Dependant on Where You Fall
When you call an insurer up and ask for a quote they look at your personal factors and past driving record to decide on how much risk is involved with insuring you. As it has been explained that is a big factor in the quote or estimate they provide for the cost to insure you. They will look at your driving history, the kind of car you drive, how old you are, your gender, your marital status and where you live. All this will impact how they class you and decide about where you fall into as a risk to insure.
As such insurance companies divide auto risks into three basic types:
Preferred- which is a low risk customer.
Standard – which is an average risk customer
Non-standard – You are very high risk and will be charged a lot of money.
State Government Regulations
There is one other huge factor in setting the auto insurance prices and that is that the rates are regulated by the state government’s insurance division. Each state has this agency in their government and they regulate the entire industry and set the rates for them.