How is my car insurance premium calculated?

We want to be as transparent as possible when it comes to our pricing. Here, we explain how your car insurance price is based on risk, how likely it is that you’ll need to claim and how large your claim could be.

What can affect your car insurance price?

Your postcode

Every postcode has its own insurance rating and your premium can change depending where you live. For example, if you live on a main road, your car insurance will typically cost more than if you live in a quieter area. Higher crime rates and areas with a greater risk of accidents can also increase the rating of an address.

Your postcode is also a good indication of how much a claim could cost, which is another thing used to help calculate your premium. So, even if you live in a less busy, more affluent neighbourhood… although there may be fewer claims, higher vehicle values can push up claims costs and the cost of your cover.

Your age and experience

The more experience you have behind the wheel, the less you might pay for your car insurance, assuming you’ve built up your no claim discount and don’t have any convictions. And it’s not just younger drivers who can expect higher premiums. When you start to get older, you might notice the cost of insurance go up as this is also linked to a higher chance of claiming. But it’s worth bearing in mind there are lots of other factors taken into account as well.

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Your No Claim Discount (NCD)

Insurers offer a no claim discount to encourage safer driving. If you’ve managed to build up your NCD , this is a sign you could be a careful driver as you haven’t had to claim for any accidents. The more NCD years you have, the lower your premium is likely to be. However, if you’ve protected your NCD and still have claims or convictions, this will be reflected in your price.

The car you want to insure

The make and model of any car you want to insure can also make a difference to your price. Lots of things are considered, like the car’s brake horsepower (BHP), if the car’s been modified at all, and how easy it is to source parts for repairs. Typically, the more expensive the car, the more it costs to insure because of the higher cost to repair or replace.

When and how you drive

If you need your car for business use, it’s likely your mileage will be higher and you’ll be on the roads more. Taking your mileage into account is something you should consider accurately as, statistically speaking, the more you drive, the more likely you are to be involved in an accident.

Who else is on the policy

Having a younger, less experienced driver on your car insurance policy can increase your price. It’s the same if you’ve added someone who’s had accidents and claims – they’re seen as a higher risk. However, if you’re a younger driver, adding a more experienced, safer driver to your policy could help reduce your premium.

What are some of the other events affecting your premium?

Cost of claims

For example, the cost of compensation for low value whiplash injuries caused by road traffic accidents (RTAs) has seen personal injury claims increase, causing premiums to rise.

Severe weather

Companies are having to regularly review the unpredictable level of claims in the future as a result of severe weather seen over the last few years, which cost insurers millions in claims, according to the ABI.

Rising taxes

The Insurance Premium Tax (IPT) rate has doubled to 12% since October 2015, which impacted premiums and has likely hit younger drivers and low-income families the worst.

Changes in legislation or regulation

Since 2022, all insurers had to follow new pricing regulations set by the Financial Conduct Authority (FCA). It means making sure existing Car or Home customers don’t pay more than a new customer for a like-for-like policy on the same day.

In 2017 the Ogden discount rate was updated. This legislation means insurers now have to pay out bigger lump sums for personal injury claims.

Repair costs

With prices increasing, the average paint and material costs have gone up nearly 16%. Around 40% of all repair work is now affected by significant delays in receiving parts. Rising energy costs have also added about £71 to every repair, and if you need a courtesy car, these costs are increasing at a rate of around 30%.

Total number of claims

Insurers paid out nearly £13.5 billion in claims in 2020 and more cars on the roads means more accidents. On top of this, the number of fradulent claims made against car insurance is significantly higher than with other types of insurance. In 2020 alone, around 55,000 fraudulent motor claims were made.

Let’s look at where the money goes, in terms of paying for claims, our operating costs and the services we provide.

How is my premium spent?