Why do car insurance rates vary so much?

To stay profitable, insurance companies will target a specific market by setting low rates for certain risk classes. The average liability rate in the U.S. is $538.73.

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Rachel Bodine graduated from college with a BA in English. She has since worked as a Feature Writer in the insurance industry and gained a deep knowledge of state and countrywide insurance laws and rates. Her research and writing focus on helping readers understand their insurance coverage and how to find savings. Her expert advice on insurance has been featured on sites like PhotoEnforced, All...

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Written by Rachel Bodine
Feature Writer Rachel Bodine

Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years (BBB A+). He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com and Safeco. He reviews content, ensuring that ex...

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent Daniel Walker

UPDATED: Apr 29, 2022

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Things to Remember...

  • Auto insurance rates are unique from carrier to carrier
  • In order for a carrier to charge fair rates, the Department of Insurance in the state must approve them to ensure they are justified and not predatory or discriminatory
  • In order to stay profitable, many insurance companies will target a specific market by setting low rates for certain risk classes and not others
  • Insurance companies use a long list of risk factors as price determinants when giving a new client or an existing client a quote for coverage
  • In the auto insurance industry, drivers who present more risk are believed to be more likely to experience a loss

Most people don’t walk around in public asking perfect strangers how much they pay for auto insurance. It is common, however, for friends and family members to discuss their rates and whether or not they’re satisfied with their insurance carriers.

As you share your frustrations, it can be even more frustrating to learn that your best friend or your brother pay less for coverage than you do. After all, they’ve gotten all of those violations over the years, right?

What you might not know is that comparing rates from household to household can be difficult and ineffective due to how personalized they are.

If you’d like to learn why rates vary and what goes into calculating car insurance premiums, read this guide to find out.

Start comparing car insurance rates now by using our FREE tool above!

Auto Insurance Companies Set Their Own Unique Rating Systems

Before a company can even begin accepting applications, they must have a thorough and well-designed rating system. While some believe that insurance is a highly regulated marketplace where all insurers charge the same base rates, that’s not the case.

While there is regulation, the regulation through the state department of insurance doesn’t get in the way of marketplace competition.

Insurance companies are free to set their own base rates and develop their own algorithms that represent risk classes and then represent how much the carrier needs to collect to stay profitable even when a lot of claims are filed.

This is why shopping the market is so important when you want to find the best rate.

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How are rates actually set by insurance companies?

A rate is technically a price per unit of insurance. Since insurers are public businesses that need to stay profitable, they’ll focus on determining how much needs to be collected to cover both the losses and the expenses of the company while also allowing for profit.

Here’s a breakdown of how rates are made internally by actuaries:

  • Pure Premium  Actuaries use studies to calculate the pure premium to determine what needs to be collected to pay for losses
  • Loading Calculations  Added to the pure premium is the loading, which will address the additional premium need to cover overhead and operational costs. This portion is what allows for a profit
  • Gross Rate  The Gross Rate is the Pure Premium and Loading Calculations added together. This is the base number used when an application is being evaluated
  • Gross Premium – The Gross Premium is what’s charged to the insurance applicant based on the number of units of insurance that the insured is applying for

Are the rates set by insurers regulated?

It might sound as if an insurer is free to charge whatever rates they want no matter how exorbitant they might be. While the state doesn’t set the rates so that the marketplace can stay competitive, they do regulate them very closely.

In fact, all licensed insurers doing business in the state must file their rates for approval before they are charged to applicants. Some of the reasons why insurance rates are regulated include:

  • To protect consumers from predatory rates
  • To protect consumers from discrimination
  • To maintain insurer solvency and to prevent bankruptcy and bailouts
  • To ensure that risky drivers and other poor risks have access to insurance


Why is it important to shop for affordable auto insurance?

In the world of marketing, it’s important for a company to select a target market when they are setting product pricing. You might think it’s possible for a company to offer competitive pricing across the board if they lower their loading, but that’s not the case.

Almost all companies in the industry will create a plan that’s tailored to set rates that’ll target drivers in a specific demographic.

This is why one company might offer excellent pricing to one household in comparison to expensive rates for another.

By shopping around for coverage, you’ll be able to see firsthand how much one company will charge you based on your personal information.

Auto insurance is a risk pool and the companies must assign each household to a different class within this pool. Here are the different classes you can be assigned to in order from cheapest to most expensive:

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What is used to assign an auto insurance applicant to a risk class?

There are several different price determinants that’ll be used to assign a household to a risk class above. Here’s a breakdown of some of the different factors that can change your class assignment for the better or the worse:

  • Driving record and accident history
  • Age, gender, marital status, and driving experience
  • Vehicle type or safety record
  • Features vehicle is equipped with
  • How much the car is used and where it’s parked
  • The applicant’s credit
  • The type of coverage and amount

Now that you can see how rates are unique from carrier to carrier, you can see why you might pay more or less for coverage than a friend. If you’d like to find the right company where you can get competitive rates, it’s time to start shopping.

Use an online brokerage-style quoting tool, and you can find the company priced right in your market. Start comparing insurance rates now by entering your zip code in our FREE tool below!


  1. https://www.investopedia.com/ask/answers/09/calculating-premium.asp?lgl=myfinance-layout-no-ads
  2. https://www.statefarm.com/simple-insights/auto-and-vehicles/avoid-these-6-big-mistakes-of-auto-insurance-applications
  3. https://www.businessdictionary.com/definition/gross-premium.html
  4. https://www.com.ohio.gov/documents/fiin_PredatoryLending.pdf
  5. https://www.iii.org/article/what-determines-price-my-auto-insurance-policy

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