How Do Auto Insurance Companies Calculate Risk?

Auto insurance risk levels are calculated by auto insurance companies considering auto insurance risk factors such as driving record, vehicle, commute, driver age, and payment history. Your auto insurance risk classification will affect your auto insurance rates, but you can save by shopping around for quotes using our free comparison tool below.

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Rachel Bodine graduated from college with a BA in English. She has since worked as a Feature Writer in the insurance industry and gained a deep knowledge of state and countrywide insurance laws and rates. Her research and writing focus on helping readers understand their insurance coverage and how to find savings. Her expert advice on insurance has been featured on sites like PhotoEnforced, All...

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insurance...

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Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years

UPDATED: Oct 30, 2020

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Purchasing auto insurance can be a bit of a process for both parties involved. As a customer, you need to research what the different auto insurance companies have to offer, find pricing that fits your budget and ensures that you have all of your bases covered with the correct level of insurance. Auto insurance companies have to assess you as a client, determine how much risk you represent to them, and figure out how to price this risk at a level that is attractive to you. Below we’ll take a look at how insurers calculate risk to determine how much you will pay for your auto insurance.

Factors that Auto Insurance Companies Use to Calculate Risk

The following are just a few of the hundreds, if not thousands of factors that insurance providers use to determine your risk as a policyholder:

Your Driving Recordcalculating risk

The first and most important factor that insurers use to determine your risk is your driving record and your previous accident history. If you are the type of driver who is accident-prone or has caused some expensive accidents, expect to pay quite a bit more for your car insurance than someone who has a clean driving record. Accidents can be incredibly expensive for auto insurance companies – especially those that cause significant injuries or property damage. If you have a clean record, try to keep it that way as it will save you a lot of money over your time as an auto insurance customer.

Your Commute

Your workplace and how far away from it you live is a major indicator of risk as the further you live, the more you will be driving each day. Many auto insurance companies will have separate policies for those individuals who live 10, 20 or more miles away from their workplace as this compounds accident risk significantly. Note: if your insurance company asks you about how far away you live from your workplace when you’re purchasing insurance, it’s best to tell the truth. If you end up in an accident during your commute and you are outside of the range that you initially provided your insurer, they will find out during the investigation and you may lose your insurance coverage. It’s best to be honest up front to make sure that your coverage is valid.

Your Car

The automobile that you are ensuring is another of the primary ways that auto insurance companies will calculate the risk involved with providing you insurance. For example, an individual who is ensuring a family sedan or minivan is less likely to drive with risky behaviors than someone who is registering a sports car. While it might seem like the auto insurance company is being prejudiced towards those individuals with families, the automobile that you drive is simply an indicator as to whether or not you are likely to drive in ways that may be more prone to causing crashes. If your car has your family in it most of the time – as a minivan would – then you are more likely to drive with care to ensure everyone’s safety.

Your Age

Your age is another factor that auto insurance companies will use to calculate the risk involved with providing you insurance coverage. Numerous studies have shown a correlation between accident risk and driver age, with those under 25 and over 65 more likely to be in automobile accidents. If you are a younger driver, expect to be charged more for car insurance than someone who has been driving with a clean record for a number of years. There are very few ways to get around this, and it’s just something you will have to deal with until you reach 25.

Your Credit Score

Many auto insurance companies will use your credit score to determine the level of financial risk that you present to them. If you have a poor credit score, expect that you’ll be charged more when you first purchase auto insurance from a new company. The reason that insurance companies make use of credit scores is to try to determine your ability to pay for your insurance premiums and other costs that you may incur. If you have a record of not paying your bills, your insurer will likely charge you a bit more to cover the risk of you not paying them.

Your Payment History

In addition, many auto insurance companies now look at previous late payments when determining risk for new customers. For instance, if you had insurance through a company before and were late making many of your payments, the company may charge you a bit more to cover the increased non-payment risk that you present. Insurance companies are experts at managing risk, so it makes sense that they will be quite sharp in doing so for their own business.

Your Marital Status

financial risk

Finally, your marital status is another factor that auto insurance companies will use in their risk analysis. Studies have shown that married drivers are less likely to get in automobile accidents than drivers who are single. Again, this is likely due to the fact that when you have other family members in the car you are more likely to drive in a safe manner then you would be if you’re driving by yourself. It seems like common sense when you think about it, which is why some insurance companies use marital status as an indicator.

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