If you own and drive a vehicle, in most states, you are required to carry at least a basic level of insurance. As car insurance is essentially a requirement of driving, it is helpful to understand how car insurance companies determine what your premium will be.
Each Insurance Company Uses Their Own Formula To Calculate Premiums
Insurance companies use complex formulas or algorithms to come up with your insurance premium rate. Each car insurance company has their own unique equations for calculating car insurance rates, which is why you may get different premium rates for the same level of coverage from different insurance companies.
Each Car Insurance Company Uses A Wide Variety of Data
Car insurance companies use a wide variety of data and information to come up with car insurance rates for each individual who applies for coverage.
To start with, car insurance companies store unique data for each type of vehicle on the road. They use information such as crash test ratings and consumer reviews to determine the risk of insuring a vehicle. For example, a vehicle with a poor safety rating will more than likely cost more to insure than a vehicle with a high safety rating due to the chance of an accident being damaging.
Next, car insurance companies collect information about accident rates for each vehicle and for different areas. For example, if you live in an area with a high number of accidents per drivers, your insurance may be higher due to the increased risk of you being in an accident based on how people in your area drive.
Car insurance companies also use personal data to determine how they think you will drive. There is a reason car insurance companies ask about your occupation and educational background. Each car insurance company uses data, which could be internally or externally generated, to determine your risk of an accident based on what career field you are in, what level of education you have, etc.
These are just a few examples of the type of data that car insurance companies use to come up with your car insurance rates.
Car insurance companies can pull this data from both internal and external sources, and use company has their own way of interpreting data, which is why when you compare rates, the difference in price can be hardly anything or hundreds of dollars, based on the information and formulas each individual car insurance uses to determine insurance premium rates. That is why it is important to get rates from multiple car insurance companies; even though your information may be the same, the way that information is interpreted can vary greatly from one car insurance company to the next.