What determines car insurance rates? The answer lies in the simple economics of the way in which insurance business is financed. When it accepts risks, an insurance company needs to know that it can pay out the benefits claimed if those risks occurred. Where does it get the money from to meet those claims? Very simply, it comes from the premiums collected from all of the policy holders. In other words, premiums need to be collected at a sufficient level to cover the cost of claims likely to be paid out. At its simplest, therefore, the more drivers claim on their insurance, the higher the premiums will be for everyone.



This will probably appear extremely frustrating to the careful motorist who has never claimed on his car insurance, of course. But the fact remains that the single most important determinant of car insurance rates is the overall level of claims settled by the insurer.

The insurer's attempt to balance risks against potential claims also brings the question of insurance rates or premiums much closer to home – to the individual policy holder – in terms of his or her personal and driving experience.

This is probably most marked in terms of the gender and age of the insured motorist. The statistics compiled by insurers show that young men and older drivers are more likely to be involved in accidents that result in a claim against their insurance. These two groups, therefore, are most likely to pay higher premiums.

Safer drivers are those who are less likely to make claims. In an effort to encourage safer and claim-free driving, therefore, insurance companies reward policy holders who have not had to make a claim – or had a claim against them – in the previous year. This is the familiar no claims discount, which, according to the particular insurance company involved and the number of claims-free years can reduce the annual insurance premium from anything between 30% and 65%.

Insurers will also refer to your postcode in an effort to assess the risk of your vehicle being vandalised or broken into. Readily available crime statistics will show that some areas have a higher incidence of such attacks and the policy holder living in such an area is likely to pay a higher premium because of it. Mitigating such risks by parking the car in a garage or driveway, rather than on the street, on the other hand, could lead to a reduction in the rate.

Insurers have developed a system of classifying cars according to their size, performance and, most importantly, their value. Clearly, a bigger, more expensive car will cost more to repair. Similarly, higher performance vehicles are more likely to be driven faster and statistics show that speed increases the likelihood of accidents.

The determinants of car insurance rates, therefore, range from the universal experience of insurers who need to cover claims payouts with premiums collected down to the individual driver's personal circumstances, their driving record and the type of car he or she chooses to drive.