How Car Insurance Premiums are Calculated

Car insurance premiums, like all insurance premiums, are determined based on risk. That is, how likely it is that a customer – and a group of customers with the same set of circumstances – will make a claim, and how much those claims will likely cost. Actuaries (those with mathematical training in the principle of large numbers and the theory of probability) must also predict how much it will cost to settle these claims, the company’s overhead, selling costs, industry taxes and the amount that must go into reserve funds to cope with catastrophes.

These factors affect what you pay for automobile insurance:

• Where you live: If you live in a bustling city, for example, accidents and vehicle theft are more likely, which may translate into higher premiums.
• The type of vehicle you drive: Insurers consider the make and model of your vehicle in terms of what the risk factors associated with it might be. For example, some makes and models fare better in collisions than others, meaning injury to the occupants and damage to the car end up being less severe. Also, newer, more expensive vehicles cost more to replace, so they are more expensive to insure. In determining your vehicle’s risk and expected claim severity, your insurance company may rely to some degree on IBC’s Canadian Loss Experience Automobile Rating (CLEAR).
• How you use your car: The more time a car spends on the road, the higher the chance of an accident. That means higher premiums if you drive a lot, you drive long distances or you drive to work everyday.
• Your driving record: Your driving record has a big impact on the premiums you pay. For example, a long driving history with no accidents can help keep your premiums down, and every accident where you're at-fault may push your premiums up. Speeding tickets and other moving violations may also increase your premiums, but parking tickets will not.
• Your statistical group: Depending on what province you live in, your insurer may consider the claims history of the group to which you belong as a driver – for example, the group of drivers of the same age and in the same geographic location. If you belong to a group that is more likely to make claims, your premiums may be higher.
• Other factors: In the highly competitive field of insurance, prices are also affected by the interplay of market forces, government regulations, taxes at many levels, discounts and unpredictable catastrophic events.

Because insurers consider a policyholder’s individual history in combination with that of his/her group, there is no one-size-fits-all method of determining premiums. Therefore, it is not the case that all 30-year-olds driving Fords and living in downtown Calgary pay the same amount for their car insurance. If the factors listed above weren’t considered, lower-risk policyholders would be subsidizing the higher-risk ones.

These factors DO NOT affect what you pay for automobile insurance:

• The colour of your car: The colour of your car does not affect your automobile insurance premium. You will not be asked to specify the colour of your vehicle on your auto insurance application.
• Whether your car is foreign or domestic: Insurance premiums will not necessarily be higher for a foreign vehicle than they will be for a domestic automobile. See “The type of vehicle you drive” in the list above for more information.