How are Car Insurance Premiums Determined?

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What state has car insurance premiums 42% below the national average? Maine. What state has car insurance premiums 80% higher than the national average? Michigan. How does this happen? Who is responsible for setting these rates? Actuaries are the analytical professionals who specialize in quantifying risk and uncertainty for insurance companies. Their goal is to minimize losses for their employer but make the policy cost as fair and competitive as possible. What are the variables that go into their analysis?

Government Mandates

Car insurance premiums are often mandated by the government, or fall within a framework of regulations set by the government. New Hampshire is the only state that doesn’t mandate car insurance but drivers do have to prove their ability to pay for damages in the event of an at-fault accident. For every other state the main regulatory objective is to protect the consumer but not be so onerous as to make the insurer risk insolvency. The three main regulatory requirements regarding rates are:

  1. They are fair compared to the risk.
  2. They are adequate to maintain insurer solvency.
  3. They are not discriminatory. The same rates should be charged for all members of an underwriting class with a similar risk profile.

Most companies would meet these objectives through the competitive marketplace but states want to make sure very few insurers go bankrupt because consumers depend on their insurance to avoid financial ruin.

State and Zip Code

Why is Michigan the most expensive state for car insurance premiums? They require coverage that guarantees unlimited, lifetime medical benefits to auto accident victims or personal injury protection (PIP). Most states that require PIP have more reasonable limits on coverage. States that have a high number of uninsured drivers combined with less than stellar weather (Oklahoma and Louisiana) or high population density (Florida) are expensive states to insure your car. States where most drivers are properly insured and have a rural population realize premiums far below the national average, like Maine.

CBS News reported that zip code can sway your costs by up to 82%. Certain urban areas have a higher risk of vandalism and theft or an increased rate of car accidents. The cheapest town in America for car insurance is Bullhead City, Arizona, but right across the river from Bullhead is Laughlin, Nevada. Their auto insurance premiums are over $500 more. One town in Texas, Allison, has high car insurance rates because it sits atop a gas field that is the world’s highest producer of helium. Compare your zip code rates at CarInsurance.com.

Marital Status

A study by the National Institutes of Health found that drivers who were never married have a significantly higher rate of car crash injuries than drivers who were married. Higher risk means higher premiums for single drivers. State Farm Insurance offers lower rates when a customer gets married and comes right out and says that men under 25 years old who marry will see an even more significant drop in their premium.

Driving History

The worst driving related thing you can do to the cost of your premium is a DUI conviction. Your coverage costs will increase by, at least, a few hundred dollars. You can’t change your driving history but racking up a clean driving record as time passes will save you money in the future.

Type of Car

Some stereotypes evolve from facts. There are more young males driving sports cars and more middle-aged women driving minivans. Car insurance costs reflect these stereotypes. The Honda Odyssey is the least expensive car to insure according to U.S. News. Minivan drivers tend to be safer drivers and the Odyssey surpasses many safety standards. USA Today reports the most expensive car model to insure is the Tesla Model S four door electric with 4WD. Safety performance is questionable and the auto pilot feature gives insurers the jitters!

Number of Miles Driven

More miles mean more opportunity for an accident. Some companies give insurance rates based on mileage. If you drive between 5,000 and 10,000 miles per year, you will see a significantly lower car insurance bill.

Credit History

Your insurance credit score is used by insurance companies to predict the risk that you will file a claim. So just like homeowners insurance, when you file a claim, expect your rates to go up. This is not related to your FICO credit score.


Massachusetts and New York are the only states that ban the practice of changing car insurance premiums based on what you do for a living. High risk occupations include daycare employees, stock clerks, bank tellers and retail workers. Low risk occupations are accountants, dentists, engineers, military officers and teachers.


Despite car insurance actuaries being able to prove education’s statistical relation to risk, some states have determined that these calculations are discriminatory. Consumer Reports states that a college degree can help you save $90 a year compared to someone who didn’t finish high school. Insurers commonly offer good college student discounts.


Montana is the only state that doesn’t allow gender to be calculated into rates. Being male and under 25 is expensive. Interestingly, women at all ages take fewer risks when driving and should be rewarded with lower premiums but 43 states charge women higher premiums and only five states, Alabama, Connecticut, Maine, Massachusetts and Montana, charge men more.

Age or Number of Years Driving

Lack of experience is the biggest cause of teen driving accidents. A young driver will pay more than an older driver. A late to learn driver will pay more than a traditional age-16-to-start driving consumer.

Type of Coverage

Basic coverage is the cheapest car insurance option but it will not provide any benefits for damages incurred. Adding comprehensive and collision coverage to basic liability will be more expensive but will mean better protection. If you have a car loan or lease your car, you will be required to purchase more coverage.

Level of Coverage

Purchasing higher levels of coverage will cost more but, most of the time, the price increase will be insignificant compared with the level of increased protection. You can also purchase many add-ons: gap insurance, personal umbrella policy, rental reimbursement and emergency roadside assistance to name a few.

Discounts Available

Just like the good student discount mentioned previously there are a variety of discounts based on the features of the car like adaptive cruise control, adaptive headlights, anti-lock brakes, audible alarm and automatic braking that will lower premiums. Driver discounts include full payment, loyalty, multiple policies and driver’s education.


Five hundred dollars is the fairly standard deductible but raising it to $1000, if you can afford it, will lower your annual premium.


Two factors that are illegal for consideration in setting a car insurance premium: race and religion.

New Development

Usage based insurance from information obtained from electronic systems monitoring your actual driving performance could lead to significant savings for the safe driver. Of course, lots of driving still leads to higher premiums but driving at a slower speed can lessen the increase.

Interested in becoming one of the actuaries who price car insurance premiums? Contact Smith Hanley Associates’ Actuarial Science Recruiter, Rory Hauser at rhauser@smithhanley.com.

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