Who Decides How Much Car Insurance Premiums Are?

To a large degree, insurance companies are responsible for determining car insurance premiums. Insurance companies use a variety of indicators and statistics to calculate premiums for their customers. Perhaps the most obvious factor that drastically affects car insurance premiums is the value of the vehicle to be insured. For collision and comprehensive insurance, the more a vehicle is worth, the greater the premiums will cost--because any damage the vehicle incurs will cost more to fix or replace. Other soft factors inherent to a car can also affect insurance: A sports car, for instance, usually has higher premiums, since drivers tend to drive them faster. Economy or hybrid cars, often driven more slowly, have lower premiums.

Another extremely important factor of premium calculation is the risk a driver presents to the insurance company--the chances that a person will damage or total the vehicle. Insurance companies collect a wide variety of data on drivers to project the likelihood that they will make insurance claims and the expected claim amounts that will be made. In general, younger drivers--especially those under 25--pay higher premiums, since they have less driving experience and often drive more recklessly. Men usually pay more than women for the same reason, and people who are married often pay less as well. Driving records, such as previous accidents and speeding tickets, also affect premiums.

Though car insurance companies determine how much to charge for a given level of coverage, it is up to the motorist to determine how much coverage she needs. So, in a sense, the driver can determine the cost of her premiums. While some liability coverage is required, comprehensive and collision coverage are not, and these types of coverage usually cost as much or more than liability coverage. By opting to forgo these extra coverages, a driver can limit her premiums. (This is usually best for cheaper, older cars.)

Another factor that determines the final amount one pays for car insurance premiums is the level of the deductible. The deductible is an upfront payment that must be made before the insurance will pay for any damage. The higher the deductible is set, the lower the premiums will be for the plan. Safe drivers who want collision and comprehensive insurance can save money on premiums by setting high deductibles. Setting high deductibles is also beneficial in the sense that one should only make insurance claims if there is significant damage to a car: Making a claim indicates to the insurance company that the driver is a risk, which often causes an increase to premiums.

Competition between insurance companies also plays a role in determining premium costs. With the advent of the Internet, researching and assessing insurance companies has become easier and premiums have become more transparent. This forces insurance companies to offer premiums that are comparable to one another. It also makes switching policies easier, which puts pressure on companies not to raise premiums.