Car Insurance > Help > How Pricing Works

You probably see insurance ads all the time that say "Save up to $300" or "Save up to 15%." Why? Why would some insurance companies be cheaper than others when they all basically offer the same thing?

This section will discuss why different companies charge different rates for the same level of coverage. To find out how changes in coverage affect your rate, please visit our page How Do My Choices Affect My Rate?

First, let's talk about how insurance companies decide what your rate will be. When you ask a company for a quote, they ask you a lot of questions. They want to know how old you are, how long you've been driving, how many accidents and tickets you have. To you, this is a bunch of pretty personal data. To the insurance company, these are all "rating factors" or "rating variables." That's a fancy way of saying that they send all of those factors into their computer servers. Their computers then use each of these things to spit out a quote.

At one level, all of this is pretty easy to understand. If you have more traffic accidents or tickets then your quote is going to be higher. If you are older or have been driving longer, your quote will be lower because more experienced drivers have fewer accidents. So, if insurance companies basically use the same factors (age, accidents, tickets, vehicle type, etc.) how come some cost more than others?

Expenses & Your Rates

Simply put, some insurance companies are more efficient than others. Like any other business, some companies are lavish with their salaries and are not very careful with controlling their costs. Others pinch every penny in hopes of eeking out a bit more profit and money savings for their policyholders. Some have invested in modern computer systems that save money and time in processing your paperwork. Generally, those that are the most efficient are able to pass some of those savings onto you.

Different Formulas

Surprisingly, expense differences are not the main reason that insurance rates are so different. The main reason you can save hundreds of dollars by shopping your policy is that companies use very different formulas to determine how likely you are to cost them money on a claim. Some companies have found in their data that older people are much, much less likely to have accidents. Others have found that people with better credit scores are less likely to get into a wreck. Even when they agree on a risk factor (a DUI is always bad for your rate), they disagree on just how much better or worse a risk that makes you. The example below illustrates how little differences in each of these factors could turn into a huge difference in your premium.

Here is an example of a single, 22 year old male with 1 speeding ticket who drives a Ford Mustang. This is a simple example; in reality there are many more factors and the formulas are much more complex.

In this simple example, Company #2 actually has lower expenses and a lower base rate. However, this company really likes "clean" drivers who have no tickets or accidents, are married, and drive conservative cars. So, in this case, our younger driver with one ticket and a sports car would be much better off going with company #1. Another driver, who has the clean record and conservative car that Company #2 likes, would do better going with them.

So, clearly, it's often not right to say that one company is "cheap" and another is "expensive" just because you know somebody who got a quote from that company. It may be that the company really liked (or really didn't like) something about the person who got the quote. You may have very different results based on the risk factors that you have compared with your friend

So, the obvious question. Now that you know how it works, why should you care? Well, since each insurance company decides in a different way how to put all of the risk factors together and come up with a price, that creates an opportunity. For example, GEICO may think that married people are lower risk, so they might give you great rates if you're married. And GMAC might not think that one ticket is much worse than no tickets, but Esurance might think that one ticket is much, much worse. All of these are just examples and are not descriptions of these companies' real rules. But, you get the idea. You need to get quotes from a few different companies to get the best rate. Because you have no idea what they are looking for compared to one another.

Things Change, You Change

You really don't know who is going to give you the best price. The only way you can find out is to get quotes from a few different companies and see how they compare. That's exactly why we thought our comparison service would be helpful for consumers.

One thing you should keep in mind is that the insurance company that is right for you at as a 25 year old may not be the right company for you when you are 35 or 45. Who you are, as far as the insurance companies are concerned, changes over time. As we said earlier, some companies really favor older, more conservative drivers. Other will have higher rates for younger drivers with worse records, but maybe not have much of a penalty. Some companies really punish you for having a bad credit score. So as your credit score changes, in either good times or bad, you may be better off with another company.

There are tons of things that change in your life that can change your car insurance rate. As you get married or divorced, as your children turn 16, as you buy different cars, move to different places, etc. the "great deal" you got two years ago may no longer be the best choice. Once again, the only way you can ensure that you are getting a good deal is shop around. We recommend that you shop at least once per year. Get at least three quotes and compare them to your current policy. You may be able to save a few hundred dollars a year that way. Not a bad wage for less than an hour of work.