What it means
Insurers price on the principle that people with similar risk should pay similar premiums. To do this, they collect information about each applicant and compare it against the claims history of thousands of similar drivers.
Typical factors include the driver's age and experience, past accidents and driving convictions, the type and value of the car, the area where it is parked overnight, and annual mileage. Some places also allow the use of credit information or telematics, which means data from a device or app that records actual driving behaviour.
Each factor is turned into a rating factor, a number that multiplies or adjusts a base premium. A young driver with a powerful car in a busy city will have high factors, while an experienced driver with a modest car in a quiet area will have low ones.
Rules about which factors may be used differ by country and region. Some places ban the use of gender or credit data, so the same driver could be profiled differently depending on where they live.
For consumers the practical lesson is that accurate answers matter, because incorrect information can lead to claims being reduced or refused. For businesses, such as employers who provide company cars, the profile of each driver affects the fleet insurance bill.
Insurers also review the profile over time. A claim-free year or a completed driving course can lower the premium at renewal, while a new conviction or a change of address to a higher-risk area can raise it.
In practice
Real-world examples.
Example
A 19-year-old new driver applies for cover on a used hatchback. The insurer sees limited driving experience and charges a high premium. After three claim-free years the profile improves and the premium falls. The driver also benefits from moving to a car in a lower-risk rating group.
Example
A sales manager with a company car and 30,000 business miles a year applies for cover. The insurer treats the high mileage as higher risk and asks about parking arrangements. The business pays more than it would for a low-mileage commuter, so the finance team considers whether the mileage can be reduced by planning routes better.
Example
A retiree agrees to fit a telematics device to her car. The data show smooth braking and little night driving. Her insurer offers a discount because the real behaviour is safer than the statistical average for her age group.
Formula
Calculation
Premium = base premium x driver factor x territory factor x claims history factor x vehicle factor
Suppose an insurer's base premium is $800. A 28-year-old driver has a driver factor of 1.25, lives in a busy area with a territory factor of 1.10, has one recent claim with a claims history factor of 1.20, and drives a safe family car with a vehicle factor of 0.90.
Step by step: 800 x 1.25 = $1,000; 1,000 x 1.10 = $1,100; 1,100 x 1.20 = $1,320; 1,320 x 0.90 = $1,188.
The annual premium is $1,188, which is $388 more than the base premium.Case study
Seen in the real world.
Keystone Courier Services is an illustrative, fictional delivery business with twelve drivers insured on private passenger auto policies. When renewal came, the insurer quoted a total of $30,000, up 20% on the previous year.
The finance manager asked the insurer to explain the risk profile of each driver. Two drivers with recent accidents accounted for $12,000 of the premium, and three had high annual mileage.
The business introduced a driver training course and monitored speed with an app. In this illustrative story, at the next renewal the profile of the two drivers improved, and the total quote fell to $26,400, saving $3,600 a year.
Watch out
Common mistakes.
- Giving inaccurate answers on an application to get a cheaper quote, which can lead to a claim being refused or the policy being cancelled.
- Assuming that the risk profile is fixed, when claim-free years, training and changes of car or address can improve it.
- Treating private passenger policies as covering business use, when business driving usually needs a different policy or an extension.
Questions
People also ask.
Why do two drivers of the same age pay different premiums?
Because their profiles differ in factors such as claims history, car type, location and mileage, even if age is the same.
Does a speeding fine affect the profile?
Yes, in most places convictions are rating factors and can raise premiums for several years.
Can I improve my risk profile?
You can, for example by building a claims-free record, completing approved driving courses, parking in a secure place and reducing mileage, and the improvement usually shows up in your premium at the next renewal.
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