Have you ever wondered why auto insurance rates and premiums vary so widely from person-to-person? Why is it that two people can be the same age and drive the same exact make and model, but have up to a $100 per month difference in what they pay for auto insurance? Why do rates range so much? In this article, we shed light on what factors determine a person’s auto insurance premiums.
Under Texas law, auto insurance companies are supposed to charge rates that are fair and reasonable considering the policyholder’s unique set of circumstances. While the Texas Department of Insurance (TDI) does not approve rates in advance, if the TDI discovers that an insurance company is gouging (overcharging) a policyholder by charging excessively high rates, the TDI can require the insurance company to refund the policyholder, however, insurance companies have the right to an appeal.
How Do Companies Decide What to Charge?
The process that an insurance company uses to decide whether to sell a policy and how much to charge is called “underwriting,” and the amount a policyholder pays for their auto insurance is called a “premium.”
These are the main factors that insurance companies weigh when deciding on someone’s insurance premium:
- Age: Males who are under the age of 25 and females under the age of 21 are charged the most on average. Rates go down as people get older but they jump back up after they turn 70.
- The person’s driving record: People are charged more if they have been in accidents or have received tickets for moving violations. Sometimes, an insurance company will deny someone a policy if they’re considered too high of a risk-based on their driving record.
- Where the car is kept: When people live in the city, they pay higher rates because the chances of an accident or theft are higher. Rates can even vary in the same city depending on the zip code.
- The type of car: When someone has a luxury or high-performance vehicle, or a sports car, they can expect to pay higher rates because they cost more to repair and replace.
- How the driver uses their car: Rates are higher when people use their vehicle to drive to and from work or for business.
- The person’s credit score: Many insurance companies use a person’s credit score to decide how much to charge them. The lower the credit score, the higher the premium is how it usually works.