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How Car Insurance Premium is Calculated

When you buy car insurance, one of the first things the insurer tells you is the annual premium amount that you will have to pay based on the type of policy you choose. This is calculated using multiple parameters, and usually, car owners don’t bother themselves with finding out how the insurer arrived at the premium amount. However, knowing the factors that contribute tothe premium calculation is important since it can help you negotiate and get a better offer. Today, we will look at how an insurer calculates the car insurance premium.

Car insurance is designed to protect you against financial losses if your car suffers repairable or unrepairable damage or is stolen. The insurer lays down certain terms and conditions of the policy under which you can raise a claim. Also, to provide this cover, a non-refundable premium is charged. A premium is a dynamic number and changes with different factors. Hence, understanding those factors is important as it can help you get the maximum bang for your buck. First, let’s look at the various types of covers available to you.

Types of covers in car insurance

In India, car insurance is a must to protect yourself and your car. There are three types of covers available:

  • Third-party liability cover – This is a mandatory cover specified by the IRDAI. Under this cover, you are protected against any financial losses arising out of damage to a person or property caused by the insured car. However, this does not include repair costs for your own vehicle.
  • Own-damage cover – This is an optional cover. If your car suffers damage due to an accident or a natural disaster, then this cover reimburses the repair costs.
  • Personal accident cover – This provides death or disability cover to the car owner. You can also add unnamed passengers of the car to the policy.

Most insurers also offer a range of add-ons or riders to customize the policy according to your requirements. Each add-on is offered for a nominal cost which increases the premium amount.

Factors affecting the calculation of car insurance premium

Here is a list of factors that the insurer considers while calculating the premium amount. While most insurers provide a car insurance premium calculator online, you need to know how they calculate it to get a good deal.

  • Insured Declared Value (IDV):
    A car is a depreciating asset – it loses value over time. Hence, while a car is more valuable inside the showroom, it starts losing value the minute you drive it out. The insurer determines the value of your car based on its age, make, model, and depreciation. This is an important figure since the IDV is the maximum amount the insurer will reimburse in the event of a theft or the total loss of the car in an accident. It is calculated as follows:

Insured Declared Value = (The car’s listed price – depreciation) + (Cost of the car’s accessories– depreciation)
Since the IDV is the maximum sum assured, it forms the basis of calculating the premium amount. However, the IDV is not used for third-party liability cover – it is only needed for the own-damage comprehensive cover. Remember, higher IDV equals higher premium and vice-versa.

  • The age of the car:
    A car loses value as it ages. As the manufacturer releases newer models, the price of older models falls. Also, the more you drive your car, the more it wears and tears, leading to a drop in its value. Most insurers have a schedule that helps them determine the depreciation rate of a car based on its age.
  • The car’s cubic capacity:
    The size of the engine of a car is measured as its cubic capacity. This is an important factor while calculating the premium for a third-party liability cover. For this cover, the age of the car is not important since the damage to a third-party vehicle or person is not dependent on the car’s age. However, the cubic capacity of the car can make a difference.
  • Your location:
    Every city, town, or village has different types of risks that your car can be exposed to. For example, if you live in a highly crowded metro, then the chances of mishaps and accidents are higher. On the other hand, if you live in a town where crime rates are high, then the chances of car theft increase. Hence, the premium is decided based on the risks your geographical location exposes your car to.
  • Deductibles:
    There are two types of deductibles in car insurance – compulsory and voluntary. The higher the deductible, the lower will be the car insurance premium and vice-versa.
  • No Claim Bonus:

Most insurers offer a discount on premium if you don’t raise a claim for one policy period. This is usually an incremental bonus that keeps increasing as the number of policy periods for which you don’t raise a claim increase.

  1. Add-ons:

There are numerous add-ons offered by car insurance companies to help customize the policy as per your requirements. Every add-on comes at an added price. Therefore, the choice of add-ons or riders will impact the premium amount.

Summing Up

As you can see, there are various aspects that an insurer considers while calculating the car insurance premium. Also, insurers like Tata AIG offer add-ons like zero depreciation cover, engine secure, tyre secure, roadside assistance, etc. at an additional cost to help you create a customized plan. These add-ons impact the total premium amount too. Ensure that you understand these factors and get car insurance that is cost-efficient and comprehensive. Good Luck!

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