How Insurance Rates Are Determined

The following is an excerpt from Ken Hardison’s book, The Ultimate Guide to Buying Auto Insurance in NC. If you would like to request a free copy, please click here or give us a call at 1-800-600-7969.

Insurance companies evaluate each applicant individually. A variety of factors are used to determine each applicant’s level of risk. Insurance is a business of risk, not a risky business. Each time a company provides someone with an auto insurance policy, that company is taking a calculated risk on whomever and whatever is being insured. You, as a consumer, are also taking a risk when you insure your car with a particular insurance company.

Both you and the insurance company are taking a chance on each other, a mutual risk if you will. Looking at buying auto insurance in this light may make it easier to understand why there are so many factors to consider and so many questions to be asked and answered before you can confidently walk away with a solid auto insurance policy. When buying auto insurance remember that insurance companies need your business just as much as you need their promise of protection.

The process by which insurance companies consider applications and evaluate an applicant’s level of risk is called underwriting. Each company follows different guidelines for underwriting, hence the varying auto insurance quotes from different insurance companies. You may inquire about an auto insurance policy and obtain quotes from three to four agencies and each one come back to you considerably different!

The best way to be ready to effectively shop for insurance is to gain an understanding of the factors used most often by insurance companies to determine rates. The most common factors used as standard measures of risk are your driving record, where you live, the type of automobile you drive, and the use of the automobile to be insured.

Driving Record

When you are buying auto insurance, you should know that your driving record is the single most important thing to consider. This factor alone can cost you a considerable amount of money. Before you decide to purchase a new auto insurance policy, check your driving record. If you can’t remember how many tickets you’ve had or how many fender benders you’ve been involved in, contact the North Carolina Department of Motor Vehicles (NCDMV) to obtain a copy of your driving record.

Safe drivers in North Carolina are rewarded with the lowest possible insurance rates thanks to the North Carolina Safe Driver Incentive Plan (NCSDIP). This is why a clean driving record is so important in North Carolina. Once insurance points are added to your record, they remain for three years. This three year period is referred to as the experience period, which immediately preceded the date of your auto insurance application or the preparation of your auto policy renewal.

Insurance points vary based on violations and your driving record along with the violations occurrence during the experience period. Depending on your auto insurance company, a single insurance point could cause your premium to increase by ten to twenty percent! If you are convicted of a traffic violation or involved in accidents for which you are found at fault, insurance companies in North Carolina will charge you higher premiums based on your driving record.

If you have tickets or charges that are about to fall off your record, try and postpone obtaining quotes for a new policy. The better your driving record, the better your quote will be. The absence of a driving record may affect rates just as much as a bad driving record.

A driver is deemed an inexperienced driver if he or she has less than three years experience behind the wheel of a car. If you were to compare identical auto insurance policies for a driver with no experience and a driver sporting a good driving record with three years experience, the rate differential could be as high as twenty percent.

Keep this in mind when buying auto insurance in North Carolina. Inexperienced drivers may affect your rate as if you were paying insurance points for an accident just waiting to happen.

Where you Live

The area in which you live can influence your auto insurance premium. Insurance companies analyze categories of data including (but not limited to):

  • Population density
  • Number of vehicles on roadways at any given time
  • Road conditions and maintenance• Auto accident statistics
  • Auto repair and replacement costs
  • Medical care costs

Those who live in urban or metropolitan areas typically pay higher insurance premiums than those living in rural areas or less populated cities.

Automobile Type

When shopping for a car, auto insurance seems to be the last thing anyone thinks about. This factor should be the most obvious thing to consider when applying for auto insurance. For instance, if you purchase a brand new luxury sedan, you will definitely pay a higher rate for auto insurance than if you were to buy that dependable used sub-compact.

The evaluation of this factor is usually based on the following:

  • Style & type of vehicle (Sedan, SUV, station wagon, sports car, etc)
  • Actual Cash Value (ACV)
  • Cost of repairs, replacement and maintenance
  • Likelihood of theft

So the next time you’ve got your eye on that slick new sports car, think about how it may affect your insurance premium…you just might find yourself attracted to that cozy family sedan on the next lot.

Use of Automobile

It stands to reason that the more you use your vehicle, the more you will pay for auto insurance. If you commute fifteen to twenty miles to work everyday, your premium will be higher than if you only use your car to occasionally drive to the grocery store.

The daily use of your automobile increases your chances of being involved in an auto accident which increases your risk to the insurance company therefore increasing your insurance premium. This factor will make a difference in your rate and can fluctuate from one insurance period to the next. Your insurance company may request an odometer reading from you each insurance period, so make sure to estimate your mileage and auto usage as accurately and truthfully as possible when applying for auto insurance.

As you are prepare to buy auto insurance in North Carolina, sit down and think about the factors just described and apply each one to you, your automobile and your current situation. Considering how these factors are relevant to you will help you when it’s time to submit your insurance application for review.

It’s always a good idea to take the necessary steps to make sure you are able to put your best foot forward when applying for an auto insurance policy. If you’d like to see how much you may possibly be charged for auto insurance coverage based on your personal information as it relates to these factors, visit to obtain free quotes from qualified insurance providers at no cost or obligation to you. By getting quotes based on your actual situation, you should be able to determine which factors, if any, need to be addressed for better or worse to improve your auto insurance rates.

The better you look to the insurance company, the better your auto insurance policy will look to you!

About the Author

Hardison & Cochran was established based on the conviction that a modern approach was essential in today’s legal landscape. Focused on delivering exceptional results through a skilled team, the firm prioritizes personal attention, integrity, and client needs. Each attorney, paralegal, and staff member is dedicated to this vision. Over three decades, with Ben Cochran overseeing daily operations, the firm has evolved into a highly respected practice.