How is car insurance calculated?

With 19.5 million registered motor vehicles on Australian roads (as of 2019)¹  most people understand that a car insurance policy is a good idea. So, how is car insurance calculated, and how much will it cost us?

Car insurance varies vehicle by vehicle and driver by driver. It’s often the case that drivers will take out cover but not fully understand exactly how the insurer arrived at their pricing decision.

We explain how some factors may affect your premium and ways to possibly reduce this cost.

Factors that affect your car insurance premium

The driver’s age

Young drivers are reportedly involved in more accidents than their elders.2This means if you have young drivers on your policy, your premiums may be higher, given their risk profile. If you don’t need to insure any young drivers, shop around for a policy that offers a discount for older/more experienced drivers (i.e. driver age exclusion).

The vehicle you drive

If you’re eager to keep your car insurance premiums down, one of the most important decisions you’ll have to make is selecting your car. Insurance premiums vary depending on the type of car you drive.

Consider the following:

• High-powered/performance vehicles tend to have high premiums. If you’ve modified your car, this may impact the price of your car insurance premium. Similarly, a high-performance vehicle may be more expensive than your typical ‘family SUV’.
• Generally, if the car is expensive to replace, it’s expensive to insure. This may also include the cost of car parts if car parts need to be imported from overseas or how common the vehicle is. For example, Toyota Corollas are common on the roads and parts are readily available. Meanwhile, a Peugeot 3008 isn’t as common, so parts may be harder to find and could be more expensive to source.

Where you park your car at home

Your insurance premium will vary depending on your car’s ‘home’ postcode. There is a higher risk in some areas that your car will be damaged or stolen, and insurance companies may take this into account when calculating your premium. Cars parked in off-street carports, garages and secure parking bays may carry a lower risk than vehicles parked on streets and in unsecured parking areas.

It’s important to make sure you inform your insurance company if your circumstances change, such as if you move to a new house. In some cases, these changes may even reduce your premium if you move to a lower-risk neighbourhood or a home with a lockable garage.

Your insurance excess

Your excess payment is a ‘customer contribution payment’ that a policy holder needs to make in the event of an at-fault claim. Generally speaking, the higher your excess payment, the lower your premium can be. However, think carefully before setting your excess payment too high, as you don’t want to put yourself in a bind later on if you need to make a claim.

Market value insurance

Market value insurance covers your car for what it’s currently worth in the market when compared to similar makes and models in similar conditions, just before it was damaged.

The regular driver

Are those regularly driving the car careful, or do they live on the edge? How the regular driver uses the car makes a huge difference to your premium.

• Low-kilometre drivers (e.g. retirees, inner-city dwellers) can benefit from a cheaper insurance premium. Less time on the road generally means they’re less likely to get into an accident!
• If the drivers listed on the policy are using the vehicle for business, you may attract a higher premium.
• You’ve probably heard of ‘safe driver’ or ‘no-claim’ bonuses. You may qualify for such a bonus (which comes in the form of a reduced premium) with some insurers if the drivers haven’t made at-fault claims against the policy for a set period.
• The regular driver’s driving history, including any previous claims, licence suspensions or loss of points may affect premiums.

A final word of caution: when purchasing your car insurance, remember to disclose all information that’s being asked of you concerning the driving and claims history of all regular drivers. Doing so helps ensure that you’re covered and covered for the correct amount.

The type of insurance you take out

The type of car insurance cover you choose has an enormous impact on your premium. There are a few different types you can take out.

Third Party Property insurance protects you for the cost of repairs to third party property if there’s an accident and you’re at fault, usually up to a certain amount. This means that if you’re involved in an accident, your insurer pays your claim for repairs, damages or replacement to third party vehicles and property involved in the incident (i.e. cars and property not owned by you). Of course, factors such as the make and age of your car, your age and driving history can impact the price you pay for this insurance.

Third Party Fire and Theft protects you in a similar way to Third Party Property insurance, but also includes cover for fire and theft-related incidents (up to a certain amount) for your vehicle. In some cases, Third Party Fire and Theft will also provide cover up to a certain amount for damages to your vehicle if you’re involved in an incident with an uninsured driver, where they’re at fault.

Comprehensive car insurance is exactly what it sounds like – comprehensive! It covers you for damage to your car, damage you cause to third parties and any associated property damage. It provides further cover for theft, fire-related damage, flood, storm and hail related damage and potentially a hire car in the event your car has been stolen (all of which depends on your insurer and which policy you hold).

Whether or not there’s finance on the vehicle

One of the final things insurers may factor into their calculations is whether or not there’s any outstanding finance on your car (i.e. you took out a loan to purchase it).

In summary

With so many car insurance options, it’s important to consider your specific requirements and circumstances before comparing policies, to make sure you choose one tailored to your needs. Shop around before you buy and remember – always read the Product Disclosure Statement (PDS), as every policy differs.