The Anatomy of Auto Insurance Premiums

Although auto insurance premiums may seem arbitrary and baseless, they actually are the result of very complex algorithms that quantify a number of factors, both personal and vehicular. The composition of car insurance premiums also depends on the amounts and types of coverages included in the policy, such as medical payments or collision coverage. Each of these individual coverages costs a certain amount of money per year, and the sum of these figures yields your annual premium. Read on for more about the anatomy of an automobile insurance premium.

Personal and Vehicular Factors

Your policy will break down your annual average car insurance premium by each coverage you include, but the price you pay for each of these coverages will depend on your attributes as well as your car’s. Personal factors that influence individual coverage premiums include age, marital status, gender, location, education, occupation, and credit rating. Insurance actuaries have computed exactly how each of these variables affects the number of claims filed, and they base their prices on those formulas.

Your car will determine the rest of the individual premium calculations on your policy. The year, make, and model of your vehicle will have the largest impact on your automobile insurance premiums. Factors like anti-theft and safety equipment can also influence premiums.

Individual Coverages

In the details of your policy, you will see a number, usually expressed on an annual or semi-annual basis, next to each coverage you have. This figure will depend on the type of coverage you have as well as how much you have chosen to include in your policy. With collision and comprehensive coverages, the size of your car insurance deductible will also have a major impact on your premiums. The higher your auto insurance deductible, the lower your total auto insurance premium will be. A typical car insurance policy will include the following coverages:

• Liability coverage (property damage and personal injury)
• Medical payments coverage
• Uninsured/underinsured motorist coverage
• Collision coverage
• Comprehensive coverage

Formulas Vary by Insurer

You might wonder why car insurance rates can vary so drastically when they are based on statistics and mathematical formulas. The answer is that each carrier computes average car insurance premiums in a different way, or using different formulas. Every auto insurer has a different set of statistics from which actuaries develop formulas to predict the claims risk an individual policyholder represents. Because these formulas determine the cost of a policy, every insurer will charge a different price for otherwise similar coverage.