How car insurance premiums are calculated

How is my car insurance calculated?

It’s always a good idea to shop around and compare car insurance quotes to get the most competitive deal.

But have you wondered exactly how insurers work out what price to charge you?

Ultimately, it all comes down to the risk you pose to them.

To calculate that risk, they’ll take into account a whole host of things that influence the likelihood of you making a claim and how much that claim might cost them.

That’ll include things like your driving habits, your car make and model, how expensive your vehicle is to repair, plus who else drives the car and any modifications you’ve made to it.

Your job

Car insurers collect data about past claims and use it to predict how likely it is that people in different occupations will make a claim in the future. If the insurer judges your job to be higher risk, you’ll pay more.

However, there may be a way to bring your premium down. When you get a quote, you have to choose your occupation from a drop-down list. There may be a few job titles that accurately describe what you do for a living - and one may bring up a lower-priced quote than the other. Always be honest, though - if you lie about your occupation, you’ll invalidate your insurance.

Car insurance groups, makes, and models

The Group Rating system categorises cars into groups, to provide insurers with their relative risk and which cars are likely to cost insurers the most in insurance claims. Every make and model of car is assigned to one of 50 insurance groups. In general, the lower the group your car is in, the less insurance you’ll have to pay.

Cars in higher groups tend to be top-of-the-range expensive models that are costly to replace and repair should they be stolen or involved in an accident. Desirable high-powered cars that are more likely to be targeted by thieves will also likely be in higher insurance groups.

Security and safety features influence which insurance group a car falls into too. For example, if a car has fewer security features, and can be more easily broken into than other vehicles, it will end up in a higher category. And cars with safety features like Autonomous emergency braking (AEB) will be in lower groups than cars without it.

You can use our car insurance group checker to find out which group your car is in.

Mileage

The amount of miles you cover in your car in a year will influence how much your policy costs.

If you do a lot of mileage, you’ll be charged more for insurance. That’s because spending a lot of time on the road means there's a greater chance of being involved in an accident.

People who do lower mileage - and therefore spend less time driving - are considered a lower risk by insurers, so their premiums will cost less.

Your age

Young, inexperienced drivers (under 25) are statistically more likely to be involved in an accident than older drivers, so insurers balance out the risk by charging them higher premiums.

Older drivers, over 70, though often more careful and experienced, are also classed as higher risk by insurers.

Gender

It’s against the law for insurers to discriminate based on gender. But figures show women pay lower premiums on average.

That’s because, in general, the risk profile of many women is lower.

They tend to have fewer accidents and claims and have better no-claims discounts. They also get less penalty points and driving convictions, both of which can push up car insurance premiums.

On average, too, women tend to drive less-powerful cars that are less likely to be involved in an accident and are less desirable to thieves.

Type of cover

Third-party only (TPO) insurance is the minimum level of cover required by law and covers injuries or damages to third parties only.

Third-party fire and theft (TPFT) covers you for damage and injury to third parties, plus fire damage or theft of your vehicle.

And comprehensive cover is the top level of protection, covering you for theft and fire, plus your car and the third party’s vehicle and passengers if you’re in an accident.

Surprisingly, although it’s the highest level of cover, comprehensive insurance policies can be the cheapest.

That’s partly because insurers regard drivers who choose comprehensive cover as being more responsible. Typically, it’s always been high-risk drivers who’ve opted for TPO cover (often younger drivers trying to save money).

It’s worth comparing prices when choosing your car insurance because you could get a higher level of cover for less money.

Add-ons

The cost of your policy will depend on whether or not you choose to add optional extras to your policy. Add-ons available include things like:

• Legal protection - this pays for your legal costs if, for example, you pursue a personal injury claim if you’re involved in a car accident that wasn’t your fault
• Breakdown cover - to help you get back on the road if you happen to break down
• Courtesy car - if your car is written off or you’re unable to use it, you get the use of a courtesy car until yours is returned or you get a replacement
• Windscreen cover - pays for repairs or replacement of a chipped or cracked windscreen
• Replacement key cover - pays for the costs associated with repairing or replacing lost, stolen, or damaged keys.

Claims history

If you make a claim on your car insurance, whether it’s a ‘non-fault’ claim or an ‘at-fault’ claim, you’re likely to have to pay more for your cover at renewal.

Insurers regard people who’ve made claims in the past as more likely to make another claim in the future. So they balance the risk by charging that customer more.

If you make no claims on your car insurance, you build up a no-claims discount. The more years you go without making a claim, the more of a discount you should receive.

Security

The safer your car is from theft, the lower you can expect your premiums to be.

Cars fitted with Thatcham-approved alarm systems, immobilisers, and vehicle tracking systems that can locate your vehicle if it were stolen can all help bring the costs of your insurance premium down.

Plus, parking your car overnight in a garage, or on a drive, helps you get cheaper insurance than if you leave your car on the side of the road.

Address

Insurers look at all sorts of statistics about your postcode to calculate the risk of a claim.

These include things like how many people live in the area and how much traffic there is. They’ll also investigate how many claims are made and the crime rate, particularly vehicle thefts and vandalism.

These risk factors can mean that people who live in big cities get charged more for their car insurance than people in rural areas and suburbs.

Named drivers

Adding a named driver to your policy who has years of experience and is claim-free can help drive down premiums, especially if you’re an inexperienced driver yourself.

Your insurer will take into consideration the fact that a safe and experienced driver is using your car some of the time, so you’ll be less likely to make a claim.

It can work both ways, though. If you add a driver to your insurance who has just passed their test or someone with a history of accidents and motoring convictions, your insurance premiums will probably go up.

Modifications

Some modifications from factory standards - like a re-engineered engine, lowering the suspension, and adding tinted windows or expensive wheel alloys - can classify your car as at greater risk of accident or theft, and so will likely increase your premium.

However, other modifications could reduce your premium - things like cameras or parking sensors that improve safety, for example.

Driving convictions

If you have motoring convictions and points on your licence for things like speeding, reckless driving, or or drugs, you’re seen as a greater risk to insure so your premiums will cost more.

Excess

Car insurers charge a compulsory excess you must pay towards a claim.

The voluntary excess is the amount you agree to pay towards a claim in addition to this compulsory excess set by your insurer.

If you choose to pay a higher amount of voluntary excess when you take out car insurance, you should get a cheaper premium.

Always make sure you set the voluntary excess at a sum you'd be able to afford though.

How can I reduce the cost of my car insurance?

There’s plenty you can do to try to keep the cost of your car insurance down.

You can choose to pay annually, rather than monthly and so avoid being charged interest. And increasing your voluntary excess - as long as you could afford the amount in the event of a claim - can make a policy cheaper. Avoiding certain modifications will keep costs down and it’s worth checking with your insurer whether increasing your car’s security by fitting an alarm and/or immobiliser will lower your premiums.

Adding an experienced driver to your policy could reduce your insurance costs and a telematics policy, which monitors how well you drive, could save you money too.

If you’re in the market for a new car, choose something less powerful and if you can lower your mileage too, the less you’ll pay.

How much can I save on my car insurance?

You could save hundreds of pounds if you compare insurance quotes from a range of providers.