How do Insurance Companies Rate My Auto Policy?

How do Insurance Companies Rate My Auto Policy?

That's a question for the ages. A huge part of the answer is that as insurance companies get smarter, rating factors change over time and the way in which companies measure risk changes as well. There are however some key rating factors that are constant and there are ways you can preserve your rating that could save you lots of money on your auto insurance.

First, it is important to understand that what you are doing when you purchase insurance such as an auto insurance policy (which is a contract and promise made by both you and the company) is you are transferring risk from yourself to the company you are choosing to write your contract with.


You promise to pay your premiums and the company promises to make you whole, by paying your damages both property and bodily injury, up to the protection limits you chose to have listed in your policy. So, what the most financially stable insurance companies have become very good at is measuring risk very carefully so that they can ensure that they have collected enough premium from their policyholders so that they can properly pay for the claims made by them and stay in business.

The last thing you want to do is to give your premium dollars to a company that mismanages their reserve funds and has the potential to go bankrupt. Just like personal credit, insurance companies also have credit ratings that you can find on the three largest commercial credit rating bureaus: A.M. Best, S&P Global and Moody’s. Anything less than a A+ rating on any of those sites and the risk is being handed back to you from the company that they might default on their promise to pay for your damages in the event of a claim.


Every piece of risk in auto insurance is measured using a history of proven statistics. These statistics must prove to the insurance commissioners of the individual states that the ratings charged meet the risks that the companies are assuming. Most of the preferred insurance companies like Allstate and Farmers, pride themselves on their long term aggregation of information and essentially being data companies first and insurers second.

The next thing to understand is that there are close to twenty different rating factors that are all measured by conducting an insurance quote. These factors throughout the duration of your policy are in reality all working simultaneously, some times in opposite directions, throughout your tenure as a driver. Some factors are causing your risk to increase and some are causing your risk to decrease all at the same time, thereby increasing or decreasing the premium you pay for your policy or by doing both - at the same time. You can think of these 20 or so rating factors like pistons in an engine, each one fueling its own responsibility or like pieces to a pie. There are 5 larger pieces to this pie that are weighted more than others. Those are below.

speed ticket

1. Tickets on your record? How recent? (good driver discount 20%, Yes or No)

2. How many years of driving experience do you have (date licensed)?

3. At-fault accidents? How recent? (distinguished driver discount, Yes or No)

4. What is your age? Are you 16-17 years old (highest risk), 50 years (lowest risk) or 90 years old; almost the same as a 16 year old in terms of being a risky driver.

5. How many miles do you drive in one year? It should go without saying that a person who is on the road more poses a higher risk of being in an accident so that person will be rated higher. Companies have become very smart in how they retrieve mileage from their policyholders. This is so they can rate them correctly and again collect the proper amount of premium for the risks they are assuming, which is good for all policyholders.

Many people have known about numbers 1-4 above for a long time but number 5 (annual mileage) has become increasingly important for insurance companies to properly measure in order to stay financially healthy for itself, its employees and to be there for its customer’s claims. Many companies have adopted very loose standards for the way in which they verify annual miles driven and although companies like to take a policyholder's word for it, most people have no idea how many miles they drive in one day let alone 1 year. In those cases, the people who ultimately suffer when an insurance company does not properly rate risks using solid statistics and ways of verifying annual miles driven are the policy holders in the form of dramatic rate increases due to lagging and or volatile reporting of annual mileage and or going out of business altogether.


For this reason, one way that you can keep one of the 5 biggest rating factors down (annual mileage) is to rotate usage on your vehicles if you have more than one auto on your policy and also, rent a car on long trips. Renting cars on long trips has also been proven to save you money on gas, wear and tear on your vehicle, breaks, tires and most importantly, you put Zero miles on your own odometer. Most preferred insurance policies will also extend your auto coverage to your rental car. However, if you do buy the extra coverage from the rental agency (which is very inexpensive) and you have an at-fault accident while you are traveling to unknown places, your insurance company will not have to pay for the accident and this will decrease the amount of risk-surcharge that your company will add to your policies' premium for the increased risk added to your policy after having the at-fault accident.

rental car

Here is a list of the other rating factors that are measured and that work alongside each other many times in different directions, up and down.

  • Zip code (measures accidents and theft in the area you drive the most and park in)
  • Usage class (do you use it for work/school, pleasure or business) parked for 8hrs/day?

  • Gender (being phased out but earlier stats show men are riskier drivers than females)
  • Marital status (stats show overall married people are more responsible drivers)
  • Occupation (stats driven ,calculated professions like science, engineering, information technology professions) prove to be more careful drivers.
  • HOA/COA members have safer spaces to park your auto at night. Less vandalism/theft.
  • Ridesharing. Yes or No (risky business)

  • Make and model of auto (not just due to the value of the auto but also stats show that some autos are stolen more than others and certain autos receive certain types of violations more than others as well, speeding tickets, etc)
  • Engine disabling devices (these make it a little harder to steal or keep when stolen.

By knowing these top rating factors, you can better manage the decisions you make in regards to the kind of auto you purchase, to where you live and how you use your auto. The most important thing to understand is that some factors are pulling your rates up and some are pulling them down. Usually, they are working simultaneously.

good driver

The 20% good driver discount is one good example of a factor working to pull your rates down. Most people don’t realize they are receiving this discount until they lose it after receiving a ticket. This could happen in the same month that you got married in which case you would not feel this rate increase as much as a single person, who is 16 years old, would who went another month without saying, “I do”.

Written by top insurance agent Jason Raya from Chula Vista, CA


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