The new math of car insurance

By Kiplinger's Personal Finance Magazine

Auto insurers are making big changes in the way they price policies, and that can mean big savings for you.

In the past, most insurers based their premiums on only a handful of variables: type of car, place of residence, age, marital status and driving record. Now they focus on 30 or more factors, including policyholder's credit history and occupation.

Pinpointing risk

Insurers have been taking your credit history into consideration for some time (in states where that's legal), because they've found a strong correlation between credit history and insurance claims. Now they study credit reports in even more detail, noting, for example, if you've made payments 30 or 60 days late.

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Insurance companies are also looking more closely at the type of car you drive. In addition to studying damage and theft claims for that model, they're examining passenger injury claims and the amount of damage done to other vehicles and their occupants.

Because they now have the computing power to pinpoint risk and match it to specific prices, insurers no longer have to cram a variety of people into a wide pricing tier. Allstate, for example, has gone from using seven pricing tiers to 384. As a result, drivers with the best records saw their rates drop as much as 25%.

"If you're a better driver, your rates are likely to fall because the subsidies that you've been providing to worse drivers will be reduced," says Bob Hartwig, president of the Insurance Information Institute.

Even people with poor driving records are likely to benefit, however. In the past, those drivers were relegated to high-risk insurers that charged hefty premiums. That's because mainstream companies didn't have a system for pricing high-risk policies for drivers with multiple accidents or major violations. Now, mainstream companies are offering to cover riskier drivers, often at lower rates than those of high-risk insurers.

Special perks

The company that offered you the lowest price under the old rules may no longer have the best deal. And the difference in premiums can be several hundred dollars.

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Working with an agent to find the best price should also help. Nick Scarafile, an agent in Utica, N.Y., uses a rating service that immediately checks a client's credit, insurance claims and driving record to get price quotes from several companies. (You can find an agent in your area through the Independent Insurance Agents & Brokers of America or by contacting agents who sell for a single company, such as Allstate or State Farm.)

In addition, you may qualify for special programs, such as Allstate's Your Choice Auto. With a record of good driving, you're eligible for discounts: Your deductible is lowered by $100 for every year without an accident (with a maximum reduction of $500), and you get a 5% premium discount for every year of accident-free driving, plus a guarantee that your rates won't rise if you have an accident.

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Enhanced versions of Your Choice Auto, including Gold and Platinum plans, cost up to 15% more than Allstate's standard coverage. Both the Gold and Platinum plans provide accident forgiveness; the Platinum level gives safe drivers a credit of up to 5% on their renewals in addition to any other safe-driving discounts they receive.

Know the score

Your credit profile has a greater impact on your auto-insurance premiums than ever before. Until now, however, it hasn't been easy for consumers to determine their insurance score, which is different from the credit score that lenders use.

Insurers and credit bureaus won't give away their recipe for the secret sauce, but you can get a version of your insurance score from TrueCredit, available through the credit bureau TransUnion for $9.95. The site provides separate scores for auto and homeowners coverage, plus advice for improving your insurance ratings.

This article was reported and written by Kimberly Lankford for Kiplinger's Personal Finance Magazine.

Updated June 10, 2008