You just drove home a shiny new car, and it’s time to secure affordable auto insurance. Once you supply an insurer with some basic details, including the make and model of your car, your date of birth, your residential address, etc., they offer you a rate quote. But have you ever wondered how they calculate this number?
Below we review how insurance companies determine your premiums and how you can save money by shopping around.
Different insurers, different quotes
Many drivers wrongly think that premium rates are established by the state. While auto insurers must meet certain laws when calculating rates, the rates themselves are not set by law.
After requesting a quote, the car insurance company considers various factors as they underwrite your rate. However, because each company uses their own actuarial method, you’ll see widely varying rates from different insurers.
Number crunching
Depending on the overriding laws in your state, auto insurers typically underwrite your rate based on some or all of the following factors:
* The year, make, model, body type, engine size and safety features of your car * Your age and gender * Your marital status * Your personal credit history * Your driving record * Your usage of the car (such as if you are using the car for work, pleasure or as a collectible.) * Home ownership status and occupation * How many drivers will be using the car and their ages * How many vehicles you own * What kind of coverage limits you want * Where you live * Your weekly, monthly or annual mileage
Generally, your agent will add all of this information into a computerized system. The system automatically places you into a price group based on your personal information. The insurance company then subtracts any discounts for which you qualify and you’re left with the final quote.
Where does my premium go?
Once you find a fair quote and decide to purchase a policy with the auto insurer, you’ll start paying a monthly insurance premium. But what exactly does your monthly premium cover? Let’s examine a typical breakdown:
* About 70 percent of your premium pays for losses and loss expenses * About 26 percent of your premium goes toward marketing, commissions and administrative costs * About 4 percent of your premium contributes to the insurance company’s profits
You better shop around
Each insurance company has differing sets of claim payments and expenses, and they set rates for each “price group” accordingly. That’s why you’ll likely receive varying quotes from each insurance company. This is why it’s so important to take the time to shop around and find the best rate.
Plus, while insurance companies are prohibited by law to calculate rates based on race and religion, they are allowed to consider your age, gender and marital status. However, each company places emphasis on different factors. For example, while one insurance company may place more weight on a driver’s gender, another company may think their driving record is more important.
This is yet another reason to request plenty of quotes before you settle on an insurance company. In addition to the rate, you should also consider which company offers the type of coverage you desire. Do your homework and find the best fit for your unique auto insurance needs.
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