How do insurers set your premium?

Updated: 
car under a treeAnother year of safe driving? Another year's worth of no claims bonus? Yet still facing another year of rising car insurance premiums?

It's hard to make head or tail of car insurance premiums. Why should you have to continually pay more when you have proved you are not a risk? If only it were that simple. There are loads of factors outside your control that affect your premium.

First we need to put insurance premiums in context. The price variations are partly just like differing prices in everything else.

A packet of Rowntree Fruit Pastilles in two newsagents near each other in central London is 50p or 70p – it is 69p in the Co-op there. If you buy a packet of ten from Asda.com they are 40p a tube. In Poundland you get packet of three for £1, making each packet less than 34p.

So there you have the exact same product at prices that vary by more than 100%, which shows that insurance is by no means the only product that has huge variation is price. And insurance is significantly more complex to price than a packet of Fruit Pastilles.

How insurers work

Insurers are cagey about how they calculate premiums, fearful they may give too much away to their competitors – the key here is that they all give different weightings to different factors. That is why two insurers might come up with wildly different prices when quoting for your insurance.

They are also constantly monitoring performance and altering their underwriting criteria and pricing structures, sometimes by the hour.

Where you live

They might, for example, spot that they have won a lot business recently in a certain geographic area. Some areas are more risky than others - more vulnerable to crime, for example - but even winning a lot of business in a low-risk area might not be that attractive to insurers.

A lot of business in one place increases their risk to a mass of claims if there is a big fire, flooding or rioting, for example. So, they may increase the premiums they quote for those postcodes, just to make sure they don't win any more business too close together. Insurers like to have their risks spread widely.

Who you buy from

An insurer might discover that it has had a higher incidence of claims or more expensive claims from one source of sales – a broker or a comparison website. For whatever reason, the customers that particular seller seems to pose a greater risk, so the insurer might nudge up the price just for that broker or website, so they win less, but more profitable, business.

Another seller might have done a special deal with an insurer offering to sell more of its insurance for a lower commission or fee. That might enable the insurer to offer cover at a lower price for exactly the same risks and claims experience. Not every insurer is on the panel of every broker and comparison site.

Then there are some sellers using different IT platforms, some even still relying on receiving CD-Roms in the post with updated prices from insurers, rather than down the line. That might mean one seller could be using yesterday's prices or another having fresh prices earlier because its computers updated sooner.

So yes, you will get two different prices for exactly the same risk with exactly the same insurer from two different sellers. And yes, you might get a completely different price from the same source if you try tomorrow or even later in today.

Personal details

Your personal details do make a big difference: Even down to the smallest detail, a change can affect your quote. And some insurers, brokers and price comparison sites ask different questions. GoCompare points out that some comparison sites may not ask for an "industry type" but simply a "job title", and this can make a difference to the premium.

RSA says that some unexpected jobs are much more risky – child entertainer is one insurers don't like. And it's not that they are driving around in oversized clowns shoes and can't see past their bulbous red noses, it is simply that they do a lot of driving between kids' parties.

Your job may also suggest to an insurer that you carry passengers who, if injured in a crash, might cost more. Parents doing a school run with lots of kids are a potentially huge claim – a seriously injured child can cost insurers millions. Similarly, loss of earnings to a wealthy person injured in your car costs insurers more than inuring a poor person.

Married or single

RSA also explains that even something such as marital status can make a difference. One of the biggest risk times for motor accidents is after 11pm at night. Despite there being far fewer cars on the road there are more accidents and they cost more. Married couples tend to be out late less than the young, free and single.

And your age is an obvious one. A 17-year-old is twice a risky as an 18-year-old and so it goes on. They tend to drive with other youngsters in the car and have accidents injuring lots of young people, who are expensive for insurers to compensate.

Insurers currently discriminate based on gender because they have evidence that women have fewer, cheaper claims than men. But this is soon to end because of an "equality" ruling in Europe. So, shortly, low-risk women drivers will be subsidising high-risk men.

Who knows, maybe evidence-based age discrimination could be outlawed too, so that older, safer drivers have to be charged the same as teenage tearaways.

What you drive

The individual rating for a make and model of a car is not just based on how fast they go or how attractive they are to steal. Some are astonishingly expensive to repair. The Insurance industry has a special lab in Thatcham, Berkshire, that crashes cars and then repairs them, calculating the cost of the most common repairs.

Car designers that fail to enable fast and cheap repairs are to blame for some price hikes. But an initially low-risk car might have premiums bumped up if it starts to attract a certain type of driver who turns out to be high risk, or becomes a common target for theft or vandalism.

Convictions

GoCompare says a 27-year-old male driving a Volkswagen Golf 2.0 TDI with a clean driving record can expect to pay £534.77 for comprehensive cover, but this jumps to £740.01 if he gets a CD10 (driving without due care and attention) conviction. With just one SP30 (exceeding statutory speed limit on a public road) conviction, his cheapest quoted premium comes in at £613.67.

But, surprisingly, not all insurers will weight premiums for the most minor speeding fine – the SP30. They may not have identified any increasing risk of claims from someone with a single speeding fine than other drivers. Though you must tell them.

Honesty is the key. Convicted criminals find it hard to buy insurance at all because, having demonstrated their dishonesty, it becomes difficult for insurers to rely on the principle of "utmost good faith" that underpins insurance.

If you tell your insurer everything they need to know to assess the risk, then they have to pay out in the event of a claim. If you have lied to them, or concealed something – even saying you always garage your car when you actually leave it parked outside your garage some nights – can invalidate the whole policy.

Cover levels

Not all motor insurance policies are the same. There is no standard industry wording so you are almost never comparing like with like. The most obvious difference is the policy excess. This can vary wildly and you can choose a higher excess to cut your premium.

Some policies include a replacement car if yours is being repaired, others don't. Some include bigger cars, some just Kas. Some guarantee using original manufacturer parts for repairs, others will fix your car with cheaper pattern parts (copies, sometimes of inferior quality).

And then there are the add-ons, such as legal expenses insurance, European breakdown and recovery or personal accident cover (if you have a crash that's your fault, everyone injured except you is covered, so PA covers your injuries).

If you are just looking at price you need to consider whether these are covered, are needed or could be bought separately.

Probability

If you have never had an accident or a theft, or a claim of any sort, it doesn't mean you are risk free. There is still an inherent risk. You might only have one accident in your whole life but it could be hugely expensive.

That is exactly what insurance is there for – to pay out the huge, incredible claims that nobody could cover themselves. And you are almost just as likely to cause that accident as anyone else – a momentary distraction, an illness, even a sneeze could cause it.

Those that have lots of small claims will find their insurance premiums in the end cover the entire cost of their claims and more, but the person who causes a motorway pile-up or disables a child will never come close to repaying the insurer. So a big part of your premium is to go into the pool that insurers need to pay out those giant claims.

Insurance relies on the vast majority paying in more than their accidents ever cost in claims. But believe me, they are the lucky ones. The lucky pay for the few unlucky ones who cause untold damage, injury and even death. Living with expensive motor insurance is much easier than living with that level of guilt.

A social service

A good analogy is to think of your car insurance premium as like the tax you pay for social services. Nobody wants to be in such a bad situation that you need social services to help you - to look after your kids because you cannot cope, for example. But we all agree we should pay for social services to help those who do need it.

Insurance can be infuriating and confusing but try to choose the best product to suit your needs. I've never met a bloke who chose his wife on the basis of which girlfriend was the cheapest date. Yet I meet loads who chose their insurance on which was the cheapest and then regretted it.

Don't let that be you.

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