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How are Auto Insurance Rates Calculated?

How are Auto Insurance Rates Calculated?

Clearing Up Some Confusion About Auto Insurance Rates.

Auto insurance can be confusing. If you’ve actually read your car insurance policy (which everyone should do, but few actually do) you know what I’m talking about. While your auto insurance policy explains what the insurance company will – and, more importantly, will not – pay for, it does not explain how prices are determined.

In practice, auto insurance rating is quite complex; handled by actuaries who compile and analyze mountains of data. But the foundation of this whole pricing process is really quite simple… car insurance companies are concerned about risk – the chance that an event they’ll have to pay for is likely to occur. High risk equals high price; low risk equals low price. It’s simple. Here are some of those risk factors that affect you and your auto insurance:

  • Previous Accidents and Claims –The statistical truth is drivers with previous accidents and claims are more likely to have additional accidents. A driver with no claims is more likely to continue that way.
  • Age – When it comes to driving, there are high risk and low risk age groups. For example, drivers age 16 to 24 are among the highest risk drivers on the road. It’s statistically proven. That’s why their car insurance rates are so much higher.
  • Where You Live – Auto Insurance rating is all about statistics. In some places accident rates are much higher than in others. Accident severity also varies from location to location.  Population density, traffic congestion, speed limits, and dangerous traffic patterns are used to analyze the area in which you live.  If you live in a statistically high accident area, this will be reflected in your auto insurance rates.
  • Vehicle Usage – How you use your car is a big factor too. For example, the driver who commutes 1 mile to work is much less likely to be involved in accidents than the driver who commutes 30 miles. The risk they represent is different and so are their rates. Other such usage factors affect rates, too.  For example, if you use your car in a business or trade, it will affect your rates.
  • Type of Car – Cars that are more expensive to fix or replace, that are more susceptible to theft or that are high performance types of vehicles represent higher risk to the insurance company. So, the price for auto insurance is higher for those cars.
  • Driving Record – People who drive unsafely represent a greater risk of accidents. Speeding tickets and other violations tell the company a driver indulges in unsafe driving habits and therefore the car insurance rates are increased accordingly.
  • Credit Score – In Maryland, your credit score can affect your auto insurance rates with most insurance companies.  So making sure you do your best to pay your bills on time and monitoring your credit report on an annual basis for fraudulent activities can help lower your auto insurance rates.  You are entitled to one free credit report from the three credit reporting companies each year.  You can visit to order your free credit reports.  If you stay with the same company for a number of years, the company is required to re pull your credit score every two years.  The good thing for you is they can only change the score for their rating purposes if the score is higher than the one they used in the original rating or on the last credit score pulled.  So if your credit score goes down, they cannot use the lower score to raise your rate at the policy renewal.

Taking these – and other factors – into consideration, an auto insurance company essentially categorizes drivers by risk level and charges them according to the level of risk they represent. This is not done individually. Rather, the insurance company has filed its rates with the state Insurance Department. Whichever filed rate levels the individual falls into, those are the rates he or she gets. Hopefully, that helps clear-up some of the confusion about why auto insurance rates vary so much from person to person, from place to place and even from company to company.

Huff Insurance is a full service Independent Insurance Agent We have been dedicated to Protecting Lifestyles™ since 1960. We offer a full array of Personal Insurance, Commercial Insurance and Life Insurance & Health Insurance products. Call us at 410-647-111
Jerry Nicklow

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