How Car Insurance Companies
Determine Premiums

By Tokkie Ferreira       Last updated Sept. 14, 2017

If you are like the rest of us, we pay our monthly car insurance premiums that seem on the expensive side. We have a set amount each month. But who sets that specific amount and how do they get the expensive number?

Are there formulas or criteria that determine our monthly premiums? As a matter of fact, there are. Premiums are calculated on various factors. Some factors can be controlled by the customer through the choice of coverage, Other factors are out of the customer's control. Let us explain what factors determine your car insurance premium:

1. Car Value


An insurance company will insure each individual car based on its current retail value. This value is based on an average between the retail price of the vehicle (which is the highest price that the car will get) and its trade-in value (which is the lowest price that will be offered for your car). retail value is calculated using the following formula: (Retail + Trade) / 2 = Market value

Most Insurers insure for the Retail value, which is the value you get in the Transunion guides. This is the highest “value” that you can insure your vehicle for. The retail value can be obtained by your dealer/broker if you are uncertain about what the value of your car is.

The car insurance premium is then figured using the car’s retail value. Other factors are also calculated in based on the car’s specifications such as make, model, year, condition, the value of added accessories and the resale value.

2. Anatomy of a Car


  • Make and Model: The insurance premiums differ depending on the make and model of your car. If the car is an expensive luxury vehicle it will be more expensive to repair than an economical car. Also, an expensive car has more risk value for theft than a cheaper car. This is factored into the premium as well.
  • Year of Make: The older a car is, the less likely it will be to obtain parts for the car. If a car of R20 000 is involved in an accident and the damages are R15 000, then it may be considered a write-off which means the Insurer will have to settle the full amount.
  • Engine Capacity: A bigger engine built for higher speeds will raise premium rates as they are viewed as more of a risk than a more sedate car.

3. The Driver


Age: Insurance premiums are based on age. Experience talks and the older a driver gets the better the premiums can get. Milestone ages that insurance companies look for are 21, 25, and 55. If you have reached any of these milestone ages, then you can seek to have your premiums discounted and reduced. After the age of 55, your insurer may offer a retiree or senior discount.

It is true that clients with a higher education are given a small discount on their premiums, but clients, whether they are excellent in their studies or not, will be penalized if they are under the age of 25 which most students are.

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Gender: This also plays a part in insurance premiums. Traditionally, single males 25 years or younger, are considered a higher risk on the road thus they have higher premiums. Studies have proven that younger males get into more accidents than younger female drivers.

Occupation: Quite a few insurance companies consider the drivers’ education and occupation when setting premium rates. More lofty professions are considered less of a risk on the roads.

Occupations such as teachers, lawyers, doctors and dentists, police officers and firemen, medical technicians, engineers, judges, accountants, librarians and military are all considered for lower premium rates. Education pays and drivers that possess a Bachelor’s degree or higher are also considered for more reasonable rates.

Marital Status: Some companies view married drivers as less of a risk than single drivers. If you are married then you may qualify for a discount from your insurance provider.

Driver’s Claim History: Driver’s with a good driving record and very little claims may get a better premium rate than driver’s with numerous claims on their record. On the opposite side of the spectrum, new drivers to the road will experience higher premiums until they build up a good driving record.

Driver’s Residence: If the driver lives or works in a busy urban area than their premiums could be raised due to higher risk through traffic infested roadways. If you live in a quiet area or in one that has security features or you keep your car in a locked facility, then you may experience lower premium rates.

4. Type of Coverage


There are two basic types of car insurance to choose from. Of course, there are other types as well, but the most common are Comprehensive or Third Party.

Third Party insurance is the cheaper option and it is very limited. It will cover you and your car and the other party’s car. It will also cover costs due to injury and accidental death.

5. Mileage Rates


This plays a significant part in determining your premiums. If you use your car for business then you incur a larger number of miles on your car than if you only use it for private use. Higher mileage translates to a higher driving risk on the road.

6. Other Factors


Excess Amount: If you set your excess amount to a higher rate then you will lower your monthly premiums.

Credit: The driver’s credit score also helps to determine insurance premiums. Insurance providers view a good credit score as a person who takes care of their finances. They then determine this driver to be more of a careful driver on the road. Usually, the better the credit score, the lower the premiums will be set.

Additional Services: If you choose to have perks such as car rental, roadside assistance, medical or death coverage or other extras, they can raise your premiums up even higher.

If you feel that you qualify for a lower premium then talk to your insurance carrier to have your premium reduced.

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