Depending on the jurisdiction, the insurance premium can be either mandated by the government or determined by the insurance company in accordance to a framework of regulations set by the government. Often, the insurer will have more freedom to set the price on physical damage coverages than on mandatory liability coverages.
When the premium is not mandated by the government, it is usually derived from the calculations of an actuary based on statistical data. The premium can vary depending on many factors that are believed to have an impact on the expected cost of future claims.[10] Those factors can include the car characteristics, the coverage selected (deductible, limit, covered perils), the profile of the driver (age, gender, driving history) and the usage of the car (commute to work or not, predicted annual distance driven).
Gender
Men average more miles driven per year than women do, and consequently have a proportionally higher accident involvement at all ages. Insurance companies cite women's lower accident involvement in keeping the youth surcharge lower for young women drivers than for their male counterparts, but adult rates are generally unisex. Reference to the lower rate for young women as "the women's discount" has caused confusion that was evident in news reports on a recently defeated EC proposal to make it illegal to consider gender in assessing insurance premiums. Ending the discount would have made no difference to most women's premiums.
Age
Teenage drivers who have no driving record will have higher car insurance premiums. However, young drivers are often offered discounts if they undertake further driver training on recognized courses, such as the Pass Plus scheme in the UK. In the U.S. many insurers offer a good grade discount to students with a good academic record and resident student discounts to those who live away from home. Generally insurance premiums tend to become lower at the age of 25. Some insurance companies offer "stand alone" car insurance policies specifically for teenagers with lower premiums. By placing restrictions on teenagers' driving (forbidding driving after dark or giving rides to other teens, for example) these companies effectively reduce their risk. Senior drivers are often eligible for retirement discounts reflecting lower average miles driven by this age group.
Marital status
Policy owners that are married often receive lower premiums than single persons. One reason is that marriage may be considered an indicator of stronger financial stability within the household.
Vehicle classification
Two of the most important factors that go into determining the underwriting risk on motorized vehicles are performance capability and retail cost. The most commonly available providers of auto insurance have underwriting restrictions against vehicles that are either designed to be capable of higher speeds and performance levels, or vehicles that retail above a certain dollar amount. Vehicles that are commonly considered luxury automobiles usually carry more expensive physical damage premiums because they are more expensive to replace. Vehicles that can be classified as high performance autos will carry higher premiums generally because there is greater opportunity for risky driving behavior. Motorcycle insurance may carry lower property damage premiums because the risk of damage to other vehicles is minimal, yet higher liability or personal injury premiums because motorcycle riders face different physical risks while on the road. Risk classification on automobiles also takes into account statistical analysis of reported theft, accidents, and mechanical malfunction on every given year, make, and model of auto.
Distance
Some car insurance plans do not differentiate in regard to how much the car is used. However, methods of differentiation would include:
Reasonable estimation
Another important factor in determining car insurance premiums involves the annual mileage put on the vehicle, and for what reason. Driving to and from work every day at a specified distance, especially in urban areas where common traffic routes are known, presents different risks than how a retiree who does not work any longer may use their vehicle. Common practice has been that this information was provided solely by the insured person, but some insurance providers have started to collect regular odometer readings in order to verify the risk.
Odometer-based systems
Cents Per Mile Now(1986) advocates classified odometer-mile rates. After the company's risk factors have been applied and the customer has accepted the per-mile rate offered, customers buy prepaid miles of insurance protection as needed, like buying gallons of gasoline. Insurance automatically ends when the odometer limit (recorded on the car’s insurance ID card) is reached unless more miles are bought. Customers keep track of miles on their own odometer to know when to buy more. The company does no after-the-fact billing of the customer, and the customer doesn't have to estimate a "future annual mileage" figure for the company to obtain a discount. In the event of a traffic stop, an officer could easily verify that the insurance is current by comparing the figure on the insurance card to that on the odometer.
OBDII-based system
In 2008, The Progressive Corporation launched MyRate to give drivers a customized insurance rate based on how, how much, and when their car is driven. MyRate is currently available in Alabama, Kentucky, Louisiana, Michigan, Minnesota, Maryland, New Jersey and Oregon. Driving data is transmitted to the company using an on-board telematic device. The device connects to a car's OnBoard Diagnostic (OBD-II) port (all automobiles built after 1996 have an OBD-II.) and transmits speed, time of day and number of miles the car is driven. There is no GPS in the MyRate device, so no location information is collected. Cars that are driven less often, in less risky ways and at less risky times of day can receive large discounts. Progressive has received patents on its methods and systems of implementing usage-based insurance and has licensed these methods and systems to other companies. Progressive has service marks pending on the terms Pay As You Drive and Pay How You Drive.
GPS-based system
In 1998, Progressive Insurance started a pilot program in Texas in which drivers received a discount for installing a GPS-based device that tracked their driving behavior and reported the results via cellular phone to the company.Policyholders were reportedly more upset about having to pay for the expensive device than they were over privacy concerns.The program was discontinued in 2000.
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