How Auto Insurance Premiums Are Priced — and 9 Legitimate Ways to Lower Yours

The basic formula: frequency times severity

Insurers price each policy by estimating the expected number of claims (frequency) and the average cost of each (severity), then adding operating expenses, commissions, taxes and a profit margin. Every rating factor is a way of predicting one of those two quantities. Young drivers, for example, have higher claim frequency; luxury cars have higher severity because parts and repair labour cost more.

The factors that usually matter most

Factors differ by country and, in the United States, by state, but these are widely used.

• Driver profile: age, years licensed, and driving record including at-fault accidents and serious violations.
• Vehicle: make, model, value, safety and anti-theft features, and how costly it is to repair.
• Location: where the car is garaged, reflecting local theft, accident, weather and litigation costs.
• Usage: annual mileage and whether the car is used for commuting or business.
• Coverage choices: liability limits, whether you carry collision and comprehensive cover, and the deductibles you select.
• Claims history and, where permitted, credit-based insurance scores. Some regions restrict or ban the use of credit or gender in pricing.

Why premiums rise without a claim

Rates are set for the pool, not only for you. If repair costs, medical costs, vehicle theft or severe-weather losses rise across your area, insurers raise base rates, and your premium rises with them. Higher prices for new and used cars, more expensive advanced-driver-assistance systems that cost more to fix after a minor collision, and rising litigation costs have all contributed to price increases in recent years. A rate increase approved by a regulator typically applies to every customer in a rating class, regardless of personal history.

Nine legitimate ways to lower your premium

None of these require cutting essential protection.

• Shop around every year or two. Insurers weigh factors differently, so the cheapest company for your profile changes over time.
• Raise your deductible to an amount you could comfortably pay in cash, after checking the break-even with a calculator.
• Ask about discounts: multi-policy, safe-driver, low-mileage, telematics, good-student, anti-theft and paid-in-full.
• Review whether older, low-value cars still need collision and comprehensive cover; the premium for those cover types can outweigh the maximum payout.
• Keep your record clean. A serious violation or at-fault accident can affect premiums for several years.
• Report accurate mileage; lower annual use can reduce the premium if you now commute less.
• Consider usage-based programmes if you drive safely, but read what data is collected and whether bad driving can raise your price.
• Maintain continuous coverage. Gaps in cover are often rated as higher risk.
• Update your policy after life changes, such as moving, marriage or a shorter commute, since each can change your rating class.

What not to cut

The most dangerous way to save money is to reduce liability limits. Liability cover pays for injuries and damage you cause to other people, and serious accidents can produce claims far above minimum legal limits. Underinsured and uninsured motorist cover protects you when the other driver cannot pay. Dropping these to save a small amount can expose your savings and income to a large judgment. Review your limits against your assets and income, and consider an umbrella policy if you have significant assets.

Comparing quotes properly

A cheaper quote is only comparable if it contains the same coverage. Line up liability limits, deductibles, rental-car reimbursement, roadside assistance and any exclusions, then compare the price. Check the insurer's financial strength rating and complaint record, and read how claims are settled, for example whether repairs are guaranteed or whether the insurer can choose used parts. A low price with weak claims service is expensive when you need it.