How Are Car Insurance Premiums Determined by Companies?

Buying a car is one of the major milestones in everybody’s lives. However, maintaining one is an expensive affair. A car insurance can shield you from all the financial burden that may fall on your shoulders in case of an emergency. Several insurance providers offer various packages and offers.

There are two kinds of car insurance policies: ‘Third-party car insurance policy’ and ‘Comprehensive car insurance policy’. In order to purchase one, you are required to pay a premium amount. Read to know more about how to calculate the car insurance premiums and the factors they depend on.

Computation of Car Insurance Premium

Calculating the premium amount for car insurance is quite hassle-free. Here’s the formula that is followed to compute it:

Own damage premium - (no-claim bonus + discounts) + liability premium

Read on to know more about the components of the car insurance premium.

Components of Car Insurance Premium

Car insurance premium is basically a summation of the three covers as follows:

● Third-party Cover

According to the Motor Vehicles Act, 1988, it is compulsory to have a third party car insurance cover for your car. It covers the expenses incurred due to the damages caused to a third-party by your insured car. The premium of third-party car insurance cover depends on the capacity of the car and is issued by IRDAI (Insurance Regulatory Authority of India).

● Own Damage Cover

This is highly beneficial but optional. The expenses incurred due to any damage caused to your insured car by man-made/natural disasters are reimbursed. The premium amount is directly proportional to the Insurance Declared Value (IDV). As the age of your car increases, the Insurance Declared Value decreases. The premium for the own damage cover is computed as a percentage of the insurance declared value as decided upon by IMT (Indian Motor Tariff).

Here’s the formula to compute IDV:

IDV = showroom price of your insured car + accessories’ costs - value of depreciation according to IRDAI

Own Damage Premium = IDV * {rate of premium (decided by the insurance provider)} + {add-ons} - {discounts and benefits (theft discount, no-claim bonus, etc)} 

● Personal Accident Cover

This component of your car insurance premium safeguards you against accidents and other mishaps that may lead to a disability. The sum insured can be increased to include the passengers who aren’t named in the insurance policy. The premium amount of this cover increases with the increase in the insured sum.

Advantages of Computing Car Insurance Premium

Knowing the tentative car insurance premium beforehand has a lot of benefits. They are as follows:

● Overall financial planning and budgeting becomes more convenient.

● Customers can perform a comparative analysis amongst several insurance options by different insurance providers and choose the one that best suits their needs.

Factors Affecting Car Insurance Premium

Here are a few factors that influence your car insurance premium:

● Insured Declared Value (IDV)

Your car has some value attached to it at any given time. The amount of accidental damage that gets compensated for under your comprehensive car insurance cover is directly affected by the value of your car at that point of time. A brand new car has more value than the one that is 3 years old with a driving record of 30,000 kilometers. IDV is basically the value placed on your car by the insurance provider in order to estimate its worth when you apply for your insurance cover.

Car insurance policies are protection policies. IDV is the maximum claimable amount for compensation under an insurance policy. Hence, if you meet with an accident resulting in the total loss of your 3 year old insured car worth Rs. 5,00,000 at the time of accident, you will not be compensated any amount higher than that.

When you purchase a car insurance policy for your brand new car, the IDV is computed depending on your new car’s ex-showroom price. If you wish to renew your already existing insurance, the IDV will be adjusted according to the operational defect that the car may have experienced due to its increasing age.

In case there are special accessories like speakers or music systems in your insured car, their value is added to the IDV. Besides, they are adjusted based on any kind of depreciation these accessories might have gone through. If the car for which you are purchasing the insurance cover is more than five years old, the IDV is decided upon by your insurer and you post the adjustment for the depreciation schedule.

Also, it must be noted that IDV is calculated only for a comprehensive car insurance cover and not a third-party insurance cover.

● Car’s Cubic Capacity

Every car’s engine size is measured as its cubic capacity. This has a huge influence on the premium amount you are required to pay for a third-party insurance policy. The amount of premium for a new car is the same as that of an older car since it is a function of the size of its engine and not its age. The capacity of an engine is not a criteria used for the computation of the premium for a comprehensive car insurance cover.

The town or city in which your car has been registered can have a major impact on your insurance premium. India has been divided into Zone A and B, based on the type of risks that the vehicles in these zones are exposed to. For example, Bangalore, Ahmedabad, Kolkata, Hyderabad, Chennai, Pune, Mumbai, and New Delhi fall in Zone A which is more prone to accidents and theft. The other cities fall in Zone B. The insurance premium to be paid in Zone A is usually higher than that in Zone B.

Let’s take an example. If your car has been registered in New Delhi, you will have to pay a higher premium for your car insurance than that required to be paid in Jaipur.

● Car’s Age

The value of a car decreases with the increase in its age. The newer models that get released mitigate the value of the older ones. In addition to this, the vehicle undergoes wear and tear which reduces its value. The premium of the car also gets influenced by the increasing age which ultimately affects its depreciating value.

In today’s era, buying a car is not only a luxury but also a necessity. Since the maintenance of a car is an expensive affair, buying a car insurance is the smartest step you can take towards a strong financial future. However, there is a premium amount which you are required to pay. Knowing about the various factors and the ways of computing the car insurance premium is necessary to be able to make an informed decision.

(Note: This article is written by Brand Desk)