How is my Car Insurance Premium Calculated?

As a car insurance customer it’s easy to be overwhelmed by the barrage of questions you face on the road to setting up a car insurance policy. There is, however, a very simple concept underpinning the assembly of your car insurance policy: Risk.

The whole concept of insurance is built on a foundation of collectively sharing risk. In the case of car insurance, we’re talking about the collective sharing of the risk of property damage and injury arising from car accidents and theft, etc. Everyone with a policy shares the burden of the total cost of claims arising from those who are unfortunate enough to suffer loss, injury or damage.

When it comes to driving and owning a car, not all risk posed by policy holders is equal, some people, by virtue of the choices they make and the way they drive, are more at risk of making a claim, and some are less at risk. It makes sense that those who are less at risk pay less for their premiums, while those who are more at risk pay more.

The questions you answer in your policy application are a structured way for the potential insurer to take a snapshot of the risk you pose, and then efficiently offer you a premium commensurate with that risk.

It’s complex - and it’s not just about who is a hoon, and who is not. However, your driving record is a very important risk assessment. If you have a significant history of at-fault crash-involvement or traffic infringements, then it’s hard to mount a case that you are less at risk of making a claim than someone with little or no history there.

This is why policies with named drivers (that is, where you elect to specify the only people who will routinely drive your car) can work out substantially cheaper than those policies with a completely ‘open book’ approach to those who drive your car.

When it comes to driving and owning a car, not all risk posed by policy holders is equal.

The distance you drive is a factor. There is some statistically small risk of crashing every time you drive, so those who drive a lot are more exposed to this risk than those who drive very little. The average car in Australia drives a little more than 13,000 kilometres every year, according to the Australian Bureau of Statistics’ 2012 Survey of Motor Vehicle Use. If you drive substantially more than this, because of your work or recreation, you can expect to pay higher premiums, and if you drive less, for example because you are retired or because you commute to work every day by train, you might expect to pay less for car insurance.

Your suburb affects the risk. Unfortunately, crime is a fact of life, and it is not homogeneously distributed throughout society. The risk of car theft is clearly higher in some suburbs, and lower in others, so if you are fortunate enough to live in a suburb with a lower than average risk of car theft, you can expect a reduction in your premiums. Unfortunately, of course, the reverse is also true.

A related item in the risk assessment process is garaging. Obviously, vehicles that are routinely housed when not in use inside a secure garage are less exposed to the risk of theft than those regularly parked on the street. This is why car insurance premiums are often lower for those with secure garaging available where they live.

Your age makes a difference, too. Road safety statistics highlight the stark relationship between age and crash-involvement. Young drivers between 17 and 25 years of age are far more likely to be involved in crashes. This is the very simple reason why premiums are higher for young drivers. However, there are some insurers who offer incentives to young drivers in the form of (for example) participating in safer driving programs in exchange for a reduction in premiums.

Some cars are riskier than others. The car you choose to own has a major impact on the premium you ultimately pay, and this is so for several reasons. Obviously, cost is a factor. The more expensive the car, the greater the cost of compensation in the event of a write-off or theft. Performance is a factor, too. High performance cars are generally more likely to be crash-involved, and this is why these types of cars cost more to insure.

A third factor is the desirability of particular cars - to criminals. Some cars, quite simply, are more attractive to thieves, and therefore more likely to be stolen. Unfortunately, if you own an expensive car with a lot of performance potential, which is also high on the theft list, you will pay more for car insurance.

If you’re planning on buying a new or replacement car, its worth researching the insurance cost of that car as part of the overall research you undertake - because making a slightly different choice might save you thousands on premiums over the term of ownership.