How Car Insurance Rates Work

People often ask us how car insurance companies determine what rates to charge. (Well, no they don't. But we think it's important to clear up any confusion.) Many factors determine what premium rate you see when you ask for quotes. A common misconception is that rates are set by law and can't be changed. Although the methods each auto insurance company uses when setting rates are regulated by state laws, the rates themselves are not set by the state. This fact means that there will be different rates for each company. Once you understand more, you'll see why comparing rates from different companies can save you money.

How is my car insurance rate set?
Let's look at what happens when you submit an application for car insurance. First, you are sorted into an individualized group based on each piece of information in your application, as well as other sources. Once your customized group has been determined, the insurance company calls up the pricing information for that group. Finally, any discounts you qualify for are subtracted from the price, and your quote is returned. The entire process is completed by sophisticated software behind the scenes, based on information you enter online or an agent types into a computer.
Why do insurance companies have such different rates?
Because each company has many different small groups and different prices for those groups, rates can vary considerably from one car insurance company to the next. Each company has its own set of claim payments and expenses, and they must set rates based on that information.