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Car insurance companies: All you need to know

Most drivers get their knowledge about car insurance from commercials by the major insurers. But there are literally hundreds of car insurance companies. Yet they’re all very different, and most of the difference is behind the scenes. Everything about the way each prices its policies is unique -- and has a direct effect on how much you’ll pay.

Below you’ll find the five most common questions we get from our readers about car insurance companies. If you don’t see the answer to your question here, search to see if we have already answered your car insurance question.  If not, you can ask your own question.

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How do auto insurance companies set my rate?

Insurance companies are in the risk business. If the average driver has an accident every 17.9 years (they do) and the average cost of repairing a car is $2,426, according to CCC Information Services, your insurance company will price its policy to pay for that accident long before you have it, plus a little something for profit. Everything that causes you to deviate from the average changes your rate.

What makes you a better or worse risk than the average driver? Your age and gender. Your driving history and your car. Where you park and how far you drive to work. And on down the line, all the way to your profession, marital status and your credit history.

Any car insurance company doing business in your state has to file the formula showing how it will price each of the rating factors it uses.

Read more: What are the primary risk factors of insurance and why are they so important?

Why do car insurance companies look at my credit?

Insurance companies see a statistical correlation between a credit score and the likelihood a person will cost them money. Researchers found consumers with lower credit scores are more likely to file claims, file exaggerated claims, and even commit insurance fraud. As with the other statistics insurance companies use, credit scores help the insurance companies assess the risk level of a potential customer. Researchers found that people with poor credit scores, below 600, tend to file more claims.

Credit score also affects how an insurance company allows you to pay for your policy. Customers with very poor credit scores may be required to pay the entire premium for a six-month policy up front. Customers with poor credit scores sometimes will not qualify for monthly billing, or may need to pay a large percentage of the policy up front and the remainder monthly.

Read more: Great credit saves you $22,815 on your car insurance

Why should I shop around for car insurance?

Insurance companies win your business by pricing their coverage low enough to attract you but high enough so that they make a profit. Giant teams of underwriters and uncounted terabytes of computing power go into their calculations.

But not every insurance company comes to the same conclusions about what’s risky and what’s not. One, for example, may believe that a person who has one DUI conviction is statistically less likely to have another and price that policy more cheaply than other companies do. Another might decide that 16-year-olds are unacceptably risky, then make any policy that includes one very expensive.

Wherever car insurance companies disagree is where you’ll save money, and you won’t find those savings unless you shop around for multiple insurance quotes.

Read more:  Save $1,102 just by shopping around

What is the fastest way to cut my car insurance bill?

Try raising your deductible. That reduces your car insurance company’s risk, and thus your bill.

But it leaves you on the hook. If you raise your deductible from $250 to $1,000, do you have the extra money stashed somewhere to repair your car? If you don’t have some kind of savings to deal with an emergency, you might wind up without a car.

If you lease your car, the finance company may require certain deductibles. Check first.

Read more: What causes insurance rates to go up?

What about the insurance discounts I see on TV?

Many of these heavily advertised auto insurance discounts have a catch. You might have to buy a much higher amount of coverage, or to have been with the company for a certain period.

In the end, you might save some money. But you can be certain that these car insurance discounts would not be offered if companies did not make more money by offering them.

Read more about some of the most popular programs: loyalty rewards, vanishing deductibles, better-car replacement, accident forgiveness, and name-your-price coverage.

How can I make sure an auto insurance company is reliable?

Do your homework. Make sure they’re licensed to do business in your state, and see how many people have complained about them. CarInsurance.com has a link to every state’s insurance regulator, and most of them will have reports that show you the number of complaints filed versus similarly sized companies.

You also want to make sure that the company has the money set aside to handle your claim. Financial strength and satisfaction ratings come from variety of companies such as A.M. Best, Fitch and J.D. Power.

Read more and find links to these agencies: Insurance company financial strength ratings

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