What do auto insurance companies do?

Auto insurance providers evaluate your driving and cover your expenses in case of future accidents. Your location, age, and driving record all affect your rates.

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insuranc...

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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

UPDATED: Jul 16, 2021

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Things to Remember...

  • The car insurance industry uses different factors to assess if you are high or low risk
  • In addition to required liability coverage, a client may purchase optional insurance
  • Different companies weigh factors in varying severity so you may have varying rates among different providers
  • Check multiple companies to ensure you get the best rate

Auto insurance companies have several duties. However, before they can offer insurance to a potential client, insurance companies need to figure out if the applicant is too risky for them to insure.

Once an insurance company determines an applicant to be a low enough risk, the auto insurance companies may offer the new applicant a policy.

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The Process of Underwriting


Through a process called underwriting, auto insurance companies determine the risk a new applicant poses. During underwriting, a company drafts an insurance policy to match the new applicant’s credentials.

Companies assess risk differently – companies may use similar standards but with varying degrees of severity. As a result, your quote can range across multiple insurance companies.

It is best to shop around to see what each company can offer you. Get started by using our FREE comparison tool right now!

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How Risk Is Determined

Auto insurance companies consider several things before deciding if they can insure an applicant. A few of those features are:

  • The zip code of the applicant
  • The number of miles the applicant drives daily
  • The type of vehicle the applicant drives
  • The applicant’s occupation
  • Marital status
  • Age
  • Gender
  • Whether the car is parked in a garage or on the street
  • Whether or not the car has anti-theft devices
  • The applicants’ driving records
  • Does the vehicle have safety features, such as anti-lock brakes?
  • Does the applicant have a high or low credit score?

Required Liability Coverage


Auto insurance companies always sell packages with liability auto insurance coverage since most states require drivers to purchase it.

Liability car insurance is what is used to prove to a state that a driver can take financial responsibility in the case of a collision.

The Required Amount of Bodily Injury Liability

Auto insurance companies are required to offer bodily injury liability coverage in the amounts that each state has set. This coverage ensures that the driver will be able to cover medical expenses in the case of an accident.

The Required Amount of Property Liability

Auto insurance companies must also sell property damage liability coverage. This insurance is used to pay for any property that is damaged in a car collision. It can include other vehicles as well as city property, like traffic lights.

Insurance and Risk


Auto insurance companies define a high risk as someone who is very likely to cause an accident. This kind of person is a risk to the company because they are more likely to file a claim for the payment of damages.

Companies use several factors to assess risk. For example, a non-married male applicant under the age of 25 would be considered to be a high risk. This type of applicant is likely to receive a high rate for an insurance policy.

On the other hand, auto insurance companies may offer lower rates to those they deem low risk.

For example, a female driver driving a vehicle with several safety features, such as seat belts and air bags, would be considered lower risk and may be offered a more affordable policy.

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Charging the Clients

New auto insurance clients can choose how to pay, once a company has offered them a policy. Clients opting to pay in larger chunks (yearly vs. monthly) may qualify for discounts.

No matter what payment option you choose, make sure you are not paying more than you need to for your car insurance coverage. Compare rates online to save significant cash on your auto insurance rates.

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Investigating Car Collisions

In the event of an accident, an insurance company must determine the party at fault.

The company conducts an investigation – they examine the police report, interview witnesses, and survey the scene of the accident.

Injured parties can file a claim for bodily injury liability coverage. If property is damaged, parties can file claims for property damage liability coverage. The insurance company processes these claims and pays expenses according.

Optional Auto Insurance Coverage


Auto insurance companies also sell optional insurance coverage in addition to liability. Clients can opt to pay more for extra coverage. Some examples of optional coverage are:

  • Collision
  • Comprehensive insurance
  • Mechanical breakdown insurance
  • Guaranteed auto protection
  • Personal umbrella policy
  • Rental reimbursement
  • Emergency roadside assistance

Since companies judge different characteristics differently, it is important to compare rates from several different companies.

The more a company sees you as a low risk, the more affordable your policy may be. Save time by comparing auto insurance rates at once.

Enter your ZIP code into our FREE auto insurance comparison tool to compare rates right now!


    1. https://www.thebalance.com/what-is-insurance-underwriting-2645778
    2. https://www.iii.org/articles/what-is-covered-by-a-basic-auto-policy.html

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