Understanding how your insurance provider can determine your car insurance premium shouldn’t be a mystery.
In this article, we’ll explore how car insurance premiums are typically calculated, what factors might contribute to a higher (or lower) premium, how a claim could impact your premium, and some tips on how you may be able to reduce the amount you have to pay.
What is a car insurance premium?
A car insurance premium is the agreed amount an individual pays to an insurer to keep their insurance policy active. In other words, it’s the amount you pay to your insurance company in exchange for them insuring your vehicle.
What type of car insurance is the cheapest?
There are several types of car insurance available, and premiums can vary depending on which one you choose.
It’s important to remember that, while a lower level of car insurance may result in a cheaper premium, it might not provide the coverage that’s best suited to your needs. Before you choose insurance for your vehicle, it can be helpful to understand exactly what you’re covered for by reading the product disclosure statement provided by your insurer.
Third party property only car insurance
This type of insurance generally has the lowest car insurance premiums (outside compulsory third party insurance, or CTP, which is the minimum level of cover required by law). It also typically provides less cover than other types of optional car insurance.1 The federal government’s Moneysmart website advises this type of insurance might be all you need if your car’s not worth much and you think you can live without it.2
Third party fire and theft car insurance
This type of insurance is generally considered to sit below comprehensive car insurance and above third party property only.3 It can typically cover damage to, or loss of, your vehicle caused by a fire or theft, as well as damage your car causes to other people's property.3
Comprehensive car insurance
Comprehensive car insurance is typically the highest level of cover available. According to data from Canstar, the average cost of comprehensive car insurance in Australia ranges from about $800 to more than $3,000.4
How is my car insurance premium calculated?
The factors that determine car insurance premiums can vary from insurer to insurer and depending on the type and level of cover you have.
However, some of the factors that can be considered by insurers include:4
- How old you are
- The make and model, value, age, condition and even the colour of your car
- Where you live and where you normally park your car
- Your driving record, including any previous insurance claims or demerits points incurred4
Another factor that can impact the cost of your car insurance premium is the excess, which is the amount you’ll pay to your insurer towards the cost of repairing or replacing your car if you make a claim. Generally, the higher the excess you choose, the lower your premium can be.4
In policies where damage to your own car is covered, any modifications you have made to your car may also be taken into consideration.
If you choose to add any optional cover to your policy, this will typically also increase your car insurance premium.4
Your car insurance premium may also be impacted by whether you choose to insure your car for Agreed or Market Value.
“Agreed Value is an amount that’s agreed upon at the time you take out the policy, and is a set amount for that policy term,” explains Marni Jackson, Youi Head of Product – Vehicle. “Market Value is not a set amount; it’s assessed at the time of the loss.”
Moneysmart lays out the potential pros and cons of each, advising that if you choose Market Value you won't know how much you'll get if you claim, and you can't change the amount. If you opt for an Agreed Value, you'll likely pay a higher premium.2
Will my car insurance premium increase every year?
There are a number of factors that could impact whether your car insurance premium will go up when it’s time to renew, including if you’ve had to make a claim in the previous year.
“Your claims history is considered when calculating premiums, so if you’ve made a claim in the past 12 months it’s likely your car insurance premium will increase,” says Jackson.
Even if you haven’t made a claim, there’s a chance you might still see an annual increase in your premium.
“As with everything, inflation does apply, and while it's common for your premium to increase year on year, it’s not always the case,” says Jackson.5
“A lot of data and research that goes into pricing gets updated throughout the year, and your policy as a whole is reviewed using the new data.”
How can I work out the cost of my car insurance premium?
There are a number of resources that could help you get an idea of how much your car insurance premium might be, depending on your personal circumstances. Youi’s car insurance calculator page could help give you a better understanding of some of the factors worth keeping in mind when choosing car insurance that suits your particular vehicle and your individual circumstances.
Comparison websites might also be helpful. However, Moneysmart cautions car owners to remember these websites are businesses too, and may make money through promoted links. They may also not cover all your options.6
Are there any ways to lower my car insurance premium?
One potential way you could lower your car insurance premium is to elect to pay your premium annually rather than monthly.
“With Youi, if you pay your insurance annually you might pay a little less,” explains Jackson.7
Opting to increase your basic excess could also reduce your car insurance premium, as can choosing to insure your car for Market Value rather than Agreed Value if that’s an option on your policy.
“It can be helpful to consider all of the optional extras and all of the things that can be adjusted and then make selections that are right for your situation,” says Jackson.
“For example, you might be able to increase your excess to pay a lower premium – however, you need to understand that at claim time, you will need to pay the higher excess.”
Article by guest writer Chelsea Spresser
1 Source: Canstar – Third party property damage car insurance, 2023
2 Source: Moneysmart – Choosing car insurance
3 Source: Canstar – Third party, fire and theft car insurance, 2021
4 Source: Canstar – How much does car insurance cost?, 2023
5 Source: Australian Financial Complaints Authority – Factsheet – insurance premium increases
6 Source: Moneysmart – Using comparison websites
7 For more details see the Car PDS