How are car insurance premiums calculated?

Man considering insurance premiums for different vehicles before purchasing

Whether you’re thinking of buying a new vehicle or just shopping around for a new car insurance provider, it helps to understand how insurance companies determine the amount you’ll pay for coverage. Let us break it down for you.

What factors are included in car insurance premium calculations?

While there are several factors that go into determining the cost of your car insurance, here are three of the most influential things insurance companies consider:

Statistical data about the make, model, and year of your vehicle. Insurance companies use the Canadian Loss Experience Automobile Rating (CLEAR) system  to price car insurance based on the likelihood that a vehicle will be involved in a claim and how much it’ll cost to cover the damages. Vehicles that are statistically less likely to be involved in collision or theft claims (or have built-in safety and anti-theft features that result in smaller losses) are generally given lower CLEAR ratings than vehicles that are more frequently involved in claims or have fewer safety features. A lower CLEAR rating generally results in a lower car insurance premium.

It’s not just about price. A more expensive vehicle that is safer and harder to steal may be given a lower CLEAR rating than a less expensive vehicle with fewer safety and anti-theft features, even though the more expensive vehicle would cost more to replace. If the more expensive vehicle statistically experiences fewer claims and smaller losses (and, as a result, gets a lower CLEAR rating) it could cost less to insure.

Where you live. The city or town you live in (right down to the postal code) can have an impact on your car insurance premium. Drivers in urban areas generally pay more for car insurance because the likelihood of collision or theft claims is higher where there are more people on the roads. Insurance companies assess the claims history of each area to determine how much should be paid by the drivers who live there. As the number of accidents and the cost of claims in any given area increase, car insurance premiums tend to increase as well.

The way you drive. Your driving record can have a significant impact on the cost of your insurance — and it’s no secret that things like licence suspensions, parking tickets, and convictions for driving offenses generally result in higher premiums. But even when you’re a good driver and have never received a ticket, your driving habits still come into play. The length of your morning commute, who you share your vehicle with, and your driving experience are considered when calculating the cost of your insurance.

Why did my car insurance company increase my premium?

If the cost of your car insurance has recently gone up, there are likely a number of factors that went into determining your new premium. While some of these factors may be within your control (like traffic tickets or at-fault collisions), others are industry-wide issues that insurance companies are working to address to keep pricing as fair as possible for all customers. Here are a few of the major contributors to industry-wide increases in car insurance premiums.

You drive a vehicle with an increased risk for theft. Car theft is on the rise across Canada, but certain vehicles are targeted more often by car thieves due to their lack of anti-theft security, their higher resale value, or their speed. If you drive a frequently stolen vehicle, then it’s likely your premium has gone up to compensate for the increased risk.

Inflation means the cost to repair damages or replace vehicles is going up. The rising costs of vehicles, materials, parts, and labour are making it more expensive than ever to repair or replace a vehicle. Ongoing labour shortages and supply chain disruptions are also adding to rising costs and insurance companies must raise premiums in response.

Physical damage claims are rising in frequency and severity. Insurers are seeing more and more physical damage claims, and the cost of resolving these claims is increasing for several reasons. Many modern vehicles are built with advanced driver assistance systems that involve complex sensors and computerized components, and these vehicles tend to cost more to repair. Distracted driving is also on the rise, which leads to increasing accidents with more severe damage. As the cost of paying car insurance claims increases, so do car insurance premiums.

Car insurance fraud is a growing problem. Car insurance fraud is also a major issue affecting the industry. Fraudsters are staging collisions to cash in on insurance payouts, which increases the frequency of claims and causes insurance costs to rise for everyone else. Insurance companies are working to reduce instances of car insurance fraud and minimize the impact they have on customers.

Every situation is unique. If you have questions about your coverage or your premium, you can contact your car insurance broker.

How can I reduce the cost of my car insurance?

Now that you know the basic factors that determine the cost of your car insurance, you might be wondering what you can do to decrease that cost. Here are some ways to lower your car insurance premium and start saving today:

Take advantage of discounts. Talk to your broker and find out if you qualify for any of the top 10 car insurance discounts available in Canada. You might be surprised how much you could save, especially if you’re eligible for multiple discounts.

Choose a higher deductible. Generally speaking, opting for a higher deductible will lower the cost of your insurance. But first, get the lowdown on deductibles to make sure a higher deductible is right for you.

Boost your car’s anti-theft security. Consider installing an aftermarket anti-theft device in your car or a stolen vehicle tracking and recovery system. These devices may help you qualify for a discount on your insurance, depending on your insurance company and location.

Get on-board with usage-based insurance. Usage-based insurance tracks your driving through an app or device plugged into your vehicle and measures speed, acceleration, hard breaking, hard cornering, and the times of day you tend to drive. If your insurer offers usage-based insurance, you may be able to save on your premium if you demonstrate safe driving habits.

Get educated. When it comes to saving on car insurance, it helps to understand your options. Learn more about how you could reduce your car insurance premium and hit the road for less.

Next time you’re shopping for a vehicle, get in touch with your car insurance broker before you seal the deal. Not only will your broker help you find the right insurance coverage for the best price, but they can also help you compare policies and prices for the models you’re considering — so there won’t be any surprises when it’s time to insure your new ride. If you’re shopping for insurance and would like the advice of a broker, you can find one here.

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