card guide
How Do Insurance Companies Work Out Premiums?
The winning number is…

As you wait for the insurance sales person on the other end of the phone or over the counter to come back to you with how much your insurance premium is going to be it’s rather like entering an unfortunate lottery. Quite how they work out the cost of insurance sometimes seems like anybody’s guess.

Car insurance

Nowhere is this lottery feeling more apparent than with car insurance. The difference between insurance for a middle aged lady driver and a young man who has just passed their test is astronomical.

As an example, for comparison only, these are the differences in annual premium between two people who want similar cover:

17 year old male    £2,906.25
55 year old female      £257.65

They are the extremes, but they serve to make the point that you can get car insurance between these two figures and it depends on a huge variety of factors.

Under the influence - So what influences the insurance companies?

There are about thirty or so factors in total that can affect the cost of your premiums, but these are the most significant ones:

- Do you have a No Claims Bonus? (No Claims Discount).

A full No Claims Discount is usually accepted to be between five and six years without making a claim. This is proof to your insurance company that you are a capable and safe driver and hence a relatively low risk.

- Age.

This is the ‘biggy’ as we can see from the figures above. Insurers will usually look at the age of the youngest driver listed on an application to drive a vehicle. So if you are a parent and are considering putting your teenage son or daughter on your insurance then you can reckon that it will bump your payments up by around £400 at least. Interestingly, the practice of trying to lower a young person’s premium by putting them on a parent’s insurance is sometimes considered illegal by insurance companies. They refer to it as ‘fronting’. However, whether they would decline to pay out in the event of an accident we don’t know.

- Postcode.

Do you live in a rural idyll or battle through an urban jungle? Your postcode will tell the insurers and living in the country is a lot cheaper for car insurance. Again, this is simply a matter of statistics: there are more cars damaged in cities and large towns than in the countryside. As an aside however, statistics can be contrary, as half of all fatal car accidents in Britain occur on country roads.

- Your occupation.

Car insurers usually split different occupations into different groups, typically jobs such as librarian and accountant are in a much cheaper group than people in ‘entertainment’ or the music industry. Heaven help you if you put “rock star” as your occupation!

- The type of cover you are asking for obviously also has a bearing on cost.

Fully comprehensive insurance is always going to be considerably more expensive than Third Party Fire and Theft. Likewise, Third Party only, will be the cheapest of the lot.

Factoring credit

Other factors will include the type of car that you are buying, the amounts of excess you have in place, your annual mileage, whether you have any offences on your licence, what you claim to be the market value of your car, whether it has security features such as alarm or an immobiliser, whether you are married or not, and rather unbelievably, your credit rating.

Increasingly insurance companies are referring to the credit rating agencies to find out if you are a risk when it comes to paying back debts. Quite why that should affect you insurance premium is anybody’s guess, but that just adds the mystery of the lottery when it comes to finding out your insurance premium!

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Posted on: [ July 05, 2018 ]       Add to Del.icio.us   Digg it   Add to Blinklist   Add to FUrl   StumbleUpon