How are car insurance premiums calculated?
Car insurance premiums are based on a range of risk factors, as well as the scope of cover you’re after. The higher the perceived chance of you making a claim and the more you’re covered for, the more expensive your premiums will be.
How the types of car insurance affect your premium
In Australia it’s illegal to drive without Compulsory Third Party (CTP) insurance, called Green Slip insurance in NSW and Motor Accident Injuries (MAI) insurance in the ACT. This covers your liabilities if you injure or kill someone in an accident. You generally pay for CTP with your car registration and may or may not be able to choose your insurer depending on which state or territory you’re in.
Private insurance offers additional coverage on top of CTP. There are three main types of optional car insurance, with premiums increasing with the level of coverage:
- Third party property damage covers you for accidental damage you do to someone else's car or property. It’s the cheapest and most basic level of coverage.
- Third party fire and theft covers everything you get in third party property damage, plus damage to your own car from fire or theft.
- Comprehensive car insurance is the highest level of coverage available, generally with the most expensive premiums. It typically adds coverage for damage from hail or other weather events, as well as damage to your own car from an accident you’re at fault for.
Agreed value or market value insurance
Your premiums may also be higher if your car is insured for an agreed value rather than market value. Agreed value means you insure your car for a predetermined amount, while market value means you’re insured for up to what the vehicle is deemed to be worth at the time you make a claim.
What extras you add
Many car insurance policies offer optional extras you can add to your policy if you pay more. Extras like windscreen cover, roadside assistance, or trailer insurance can increase your premiums, although are still often cheaper to add to an existing policy compared to standalone cover.
What risk factors influence your premiums?
On top of the type of car insurance you choose, your premiums can also depend on how much of a risk your insurer deems you. Factors it may assess include:
Your age (and gender)
Drivers in higher risk age brackets may need to pay higher premiums. Insurers often view drivers under 25 as inexperienced and more likely to drive dangerously, while premiums also can increase for drivers older than 70, whose reactions may have slowed.
Since the numbers also show men are more likely to get in car accidents, male drivers may pay higher premiums than their female peers.
Your driving history
Another factor is your driving record. If you’ve never made a claim or received a penalty for a dangerous driving offence, you might pay lower premiums than someone who has. Some insurers offer ‘safe driver discounts’ or ‘no claim bonuses’ that often increase each year you don’t make a claim.
Your vehicle
Your insurer will also make an assessment of your vehicle when determining your premiums. More expensive cars generally incur higher premiums because they’ll cost more to replace. It can also make a difference how easy it is to get parts for your vehicle - European cars can be more expensive to insure than Asian or Australian vehicles because parts may have to be imported.
How often you drive
When you get a car insurance quote you’ll generally be asked to estimate how many kms you’ll drive for the insured period. The more you drive, the greater the risk of an incident, so generally the higher your premiums may be.
Where you drive and park
Where you’ll be driving and parking your car can also make insurance more expensive. You might pay more if you live in a high theft area for example, or if you’re adding roadside assistance and you regularly drive on remote roads. If you have a garage where your car will be safer from theft and weather damage, you might pay less.
Your excess
Many insurance policies allow you to choose the excess on your policy, which is what you’ll pay if you make a claim. A higher excess can lower your premiums, but can make claiming more expensive, so it’s a bit of a gamble you make with yourself.
How to save money on your car insurance
There are a few ways you might be able to save on your car insurance premiums:
- Insurers often have special discounts and deals to attract new customers.
- However, many insurers do offer lower premiums if you keep renewing, particularly if you don’t make a claim.
- Driving safely and avoiding claiming if you can could lower your premiums, as well as qualify you for discounts or bonuses.
- Driving less can also lead to lower premiums.
- Paying annually is usually cheaper than paying month to month.
- If you need multiple policies, you might be able to bundle for a multi-policy discount.
- Shopping around and comparing different car insurance policies could help you find one with low premiums that suits your needs. You can compare car insurance with Canstar.
- Letting your insurer know if you move house could reduce your premiums if you move to a low risk area.
- Vehicles that are commonplace in Australia are usually easier to find parts for, cheaper to repair, and therefore cheaper to insure. If you’re choosing between similar vehicles, say a Toyota or a Volkswagen, and can’t make a decision, bear in mind the Toyota may be comparatively cheaper to insure.
