Car insurance – it’s a numbers game, but just how are premiums calculated?


How car insurance premiums are calculated

It’s a real sign of adulthood when you find yourself discussing how much you pay for your car insurance with your friends instead of how much you paid for last night’s drinks.

The car insurance discussion usually leads to outrage on someone’s part that they’re paying way more than everybody else. So, why is it that some pay more than others for car insurance when there is seemingly not much separating the two drivers? And how can you go about lowering your premium? Let’s investigate and get you some answers to these very pertinent questions.

How are car insurance premiums calculated? 

Instead of delving into actuarial territory and attempting to explain logarithms — which will most likely leave both you and us extremely confused — we’re going to keep it simple.

In Australia and New Zealand, car insurance companies tend to arrive at a premium specific to you based on the followingfactors:

Age — being older is completely favourable when it comes to car insurance premiums. The older you are, the more experience you have and, therefore, the less likely you are to be in an accident.

Residence — if you live in a safe suburb (where your car is likely to spend most of its time) that is statistically less prone to theft, your premium will be lower. If you live in dodge central, expect to pay a higher premium.

Parking — if your car is parked in a garage overnight, your premium goes down. If it’s parked on the street overnight, your premium goes up.

The car itself — there are so many things to take into account here. For starters, if your car has safety features, your premium will be lower. There’s also a delicate balance to be had between older cars that are more prone to accidents but are cheaper to replace and newer cars that are less prone to accidents but are more expensive to replace. Certain makes and models of cars are also more expensive to insure due to the common profile of those who drive them, as well as the expensive nature of their parts to repair. Manual cars are also cheaper to insure than automatics.

Driving history — the fewer claims you’ve made in the past, the lower the insurance premium you can expect to pay.

It pays to be a woman

 Women get a pretty raw deal in so many areas of life, so let’s all take this minor win and run with it. While it might seem that cars and anything related to them tend to be claimed by men as standard masculine territory, when it comes to car insurance premiums, it’s the women who typically have the upper hand.

While men may not like to admit it, women are statistically much safer drivers. Women are a far more pleasing prospect to car insurance companies because they are typically less costly to insure — meaning, they make fewer claims.

While both men and women get into car accidents, the statistics show that women are still involved in fewer car accidents than men and that accidents involving women are typically less costly than those involving men.

Men are also deemed a higher risk as they have been shown to be more likely to drink and drive, take drugs and drive, speed, take risks on the road, suffer from road rage and elect not to wear a seatbelt. So, basically, men are more likely than women to do dumb things when they get behind the wheel.

So let’s all put that age-old argument of whether men or women are better drivers to rest, shall we? The insurance premiums have spoken.

Other than being born female, how else can I lower my premium?

 The list of factors that goes into determining your premium is a great place to start when it comes to lowering how much you pay to insure your car.

While you can’t do much about your age or gender, there are some things that are within your control. Where you live is something that will likely be influenced by a number of factors, but the next time you move, consider how where you’re moving to will influence your insurance premium — is it a relatively safe neighbourhood or is it prone to theft? What are the options for where your car will be parked overnight? Will the likely higher cost of buying or renting in a safer suburb where there is secure parking be offset by the lower car insurance premium over time?

When you’re purchasing a car, make a smart decision from an insurance perspective. Assess the safety features and find out how hard or expensive it will be to replace parts and repair. Give consideration to how the other factors when coupled with the type of car you choose to purchase will affect your insurance premium (for example, a 21-year-old male who buys a Holden Monaro can expect to pay an arm and a leg for insurance).

Using telematics as part of your insurance policy is another way you can save. Telematics insurance — sometimes called black-box insurance — is a growing area of insurance and uses technology to track your driving behaviour. Instead of using assumptions like age or gender, telematics devices send data to your insurer who then adjusts your premium based on your specific driving skills or habits. One of the potential benefits of telematics allows young drivers, for instance, to prove their driving skills and possibly taking them out of the ‘high-risk’ category.

Most importantly, though, the most obvious and the most pertinent thing you can do to lower your car insurance premium is to drive safely. This extends to all of the following really basic things:

  • Always use your turn signals
  • Always check your blind spot before changing lanes
  • Pay attention to the road and not to your phone
  • Stick to the speed limit — safe speeding isn’t a thing
  • If you’ve been drinking and you’re not sure you’re right to drive, then don’t
  • Make sure you regularly check that your headlights and brake lights are working
  • Service your car regularly
  • Be courteous on the road
  • Don’t follow too closely


While all of this might seem like common sense, all of these things are the most common causes of accidents. If you’re doing all of these things 100 per cent of the time, your chances of needing to make a claim reduce dramatically — and, as such, so will your premiums when you have a solid history of not needing to make claims.

But bear in mind…

 While all of the above factors will contribute to a lower premium, different insurance companies will place different amounts of weight into each factor. And as much as we may begrudge them for it, insurance companies do need to turn a profit, so if they have paid out a significant amount of claims in the previous year or years, then your car insurance premium will rise in the following year.

Given this, the frustrating reality is that you can be an experienced driver with a pristine claims history, who lives in a statistically safe suburb where your car is parked in a secure garage — and you still might have a higher premium than the next person.

So, while safe driving is a sure way to keep your car insurance premiums low (and it’s also just what you should be doing for the sake of being a good human), it’s important that you get a number of quotes from different insurers, because chances are you can get a better deal somewhere else. There are two very important things to remember with this advice, though:

  • Get a range of quotes each year at renewal time — where you were getting the best insurance deal the previous year may not be where you’ll get the best insurance deal the following year.
  • Study the PDS and the exclusions and be sure you know under what circumstances your insurer will pay out and how much they will pay out — while your insurance premium may be significantly lower with a certain company, they may also be your worst nightmare if and when you need to make a claim. Just because it’s cheaper, it doesn’t mean it’s better or even equal to a more expensive policy. Make sure the policy you choose is right for you in more than just the area of cost.




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