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Question 4:     How are automobile insurance premiums calculated?

Insurance companies have complex rating calculations to determine the premium you pay for automobile insurance; however, in simplest terms your premium is generally calculated using the following formula:


Base Rate

Base rates represent the cost of a given unit of insurance for each specific type of auto coverage, such as Third Part Liability or Collision. For example, a base rate for Third Party Liability might be $1,000 for $1,000,000 worth of coverage.

Rating Factors

Rating factors are designed to account for the various levels of risk associated with operating a vehicle. Typically, each rating factor is assigned a specific differential (or multiplier) which is then applied to the base rate. Rating factors vary by insurer but some of the most commonly used factors include driving record and experience of the vehicle operator, type of vehicle, use of vehicle and geographic location.

Discounts and Surcharges

Various discounts and surcharges may also be used in conjunction with rating factors to evaluate risk and calculate premium. Discounts are decreases that are applied to reflect a reduced risk level or additional coverage. Some of the most common discounts offered include multi-vehicle, multi-policy, loyalty, anti-theft and winter tires. Surcharges are increases that are applied to reflect greater risk levels and are typically based on the number of at-fault accidents and/or convictions a vehicle operator has experienced.


Please note that the specific manner in which an individual insurer determines premiums may differ from the example above. Your insurance representative should be able to provide guidance regarding how your premium is calculated.

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