Basics of Car Insurance Premium Calculations

We are made to believe that automobile insurance premium calculations are very complex and hard to understand. It is something that is done by supercomputers with sophisticated programming. We are forgetting that only a few years ago they were done by hand. In any case, there is a basic logic behind these complicated programs that works out quotes. Looking into how rates are determined can help in shedding lights into how underwriters think.

How Is Auto Insurance Calculated?

Even the most sophisticated programs are based around basic ideas. Pricing policies follows fundamentals of assessing risks. Here are some of those points to help you see how an underwriter determines the figure you know as the premium.

  1. Risk Factors: Any calculation method must take the key factors into account. There are literally tens of them that influence the price. However, 3 key factors are; how risky included drivers and the car are and how much protection is needed.
  2. The Company: The way they assess exposure and accept is the other key determinant. Each has its own underwriting principles and rates. For example, one can quote half the price for the same risk in comparison to another because they have a better understanding of a particular risk group like youngsters.
  3. State Rules and Demographics: It is a well-known fact that rates are more expensive in certain states in comparison with neighbors. Demographics, accidents, and the number of drivers are some of the reasons behind this. But it may be that strict rules are protecting you well against vehicle insurers and therefore they have to increase premiums to pay for larger claim settlements.

We can have a long list here but it wouldn’t serve the purpose any more. It is best to appreciate these points within context.

Automobile Insurance Calculation Example 1: Basic Liability vs Full Coverage

This example is about the size of security required. Many motorists see quotes for basic liability and get discouraged from asking for more. However, the more you buy the lower the rates get and you may only need a few hundred dollars more for full coverage. The reason for this reverse correlation is that a basic policy already includes the costs of issuing and administering that you only pay for the extra protection when you replace a liability only policy with full coverage.

The costs of maintaining files, issuing documents and so on are included in the minimum threshold that they won’t influence the price of additional coverage. Furthermore, it costs money to find a new customer. Therefore, automobile insurance companies are keen to sell more to existing policyholders, even at discounted rates.

Another important point to note is that most accidents are small ones and remain within the minimum liability limits. The chances of you causing large losses to third parties is slim. Therefore, even if you increase the limit to a million dollars what really is important is the likelihood of you actually causing such large damages. The premium is based on the expected losses. The higher the level of protection the lower the rates applied to these amounts.

For example, if you request a $50,000 coverage the rate may be 0.014;

$50,000 x 0.014 = $700.

When you increase the liability limit to $1,000,000 the multiplier will go down considerable to say 0.001;

$1,000,000 x 0.001 = $1,000

In short, there is a reverse correlation between the rates applied and the amount of coverage. As you can see above, the protection has increased 20 times but the price hasn’t even gone up 50%. Hopefully you have a better idea now.

Always check the quotes for the level of coverage you want before settling for the minimum. Of course, the answer would be Liability Only if you ask what is the cheapest car insurance I can buy. However, why not get what you need, rather than going for a bare bone policy since it is needed to drive.

Vehicle Insurance Premium Calculation Example 2: New vs Experienced Driver

For example, a young person with a cheap car doesn’t even think about anything else but Liability Only for many reasons. One of them is the well-known fact that rates are higher for youngsters. In later years, that young person comes of age and gains sufficient experience. As a result, he/she qualifies for plenty of discounts that makes the premium more affordable. This is when most of them are happy to offer a good policy package for only a slight price increase because of the reduced risks.

Auto Insurance Premium Calculation Example 3: Typical vs Sports Car

There are a few brands of typical automobiles in wide circulation. Their main characteristics are; they are reasonably cheap for everyone to purchase, it is easy to get them repaired since there are plenty of parts and labor and they are pretty easy to handle even for a young driver. On the other hand, sports cars have totally different characteristics; they are fast and not really for inexperienced drivers, they are expensive and you need a lot of money to replace them and they are costly to repair because of expensive parts.

It is clear that sports cars are higher risk and you would be charged much more for them. You will have to pay a lot more if you are a high risk driver (or have one in the household).

Why Is It Important to Know How Car Insurance Is Priced?

The problem is that many people don’t take the time to explore the options to the fullest. They somehow make their minds up as to what they can afford or what they should buy due to costs and other factors. Playing around with the level of protection and costs can help see things clearly. Today, you can play around as much as you like with the details and find out the prices for each type of coverage.

There are many online quote comparison platforms just like the one we have on this site. You enter the details on your own time and the program works out a quotation for each situation. You don’t need to talk to anyone and you don’t need to worry about being chased or pressured by sales representatives when buying auto insurance online. You can walk away anytime you like or stay and find out more about the companies involved.