How do the insurance companies calculate the premium quoted?

In theory, the calculation of a premium is very easy. All insurers have access to national statistics on the number of accidents and the average cost of loss from each accident. So, if a company insures 10,000 drivers, it's easy to estimate how many accidents they will have and how much the total losses will be. This total is divided equally between the drivers as the premium. Except this would not be completely fair - and, for once, being more fair makes good business sense.

When learning to drive, there is a real risk of an accident. Looking at the national statistics will tell you that, as a group, drivers in the age range of 18 to 25 make the most claims and claim the highest amounts. Through inexperience and recklessness, the risk of accidents is high and, because vehicles tend to be driven at a higher speed, the amount of damage caused is greater. Now compare this with the national statistics of women drivers in the age range 45 to 55. This group has the lowest number of claims because the majority drive within the law and with an eye to safety. This contrast leads to a common industry practice called “loading”. The premiums of the groups with the highest claims record are increased. It is fair that the more dangerous drivers pay more of the losses they cause rather than look for subsidies from the safest drivers. This allows insurers to offer discounts to the safest groups which encourages loyalty and rewards their defensive driving style. Every insurer benefits from loading the premiums of the inexperienced and dangerous while rewarding the good drivers.

When it comes to assessing risk, there are a number of other relevant factors starting with the number of miles driven, the time of day the driving takes place and where the vehicle is parked over night. People who make only short journeys at off-peak times are significantly less likely to have an accident as against those who drive long distances when the roads are at their busiest. So a homemaker who only drives the kids to school and for shopping will have a lower premium than someone who commutes long distances to work. Now add in the zip code factor. This is controversial. California has banned insurers from loading premiums based on where people live. But it is a fact that there is more theft and vandalism in some areas than in others. Put another way, those of you who lock the vehicle in a garage overnight will pay less than those who leave the car on the street. Finally, the statistics show some high-powered vehicles are more likely to be involved in an accident or stolen than others. Before you buy, always check to see whether the make and model are high or low risk. This directly affects the premium you will pay.