How Car Insurance Premiums Are Calculated

Whether calculating premiums for a souped-up sports car, or a hatchback that belongs to a 19-year-old P-plater, insurers will run through a checklist of potential risks.

When you get your next Car Insurance premium, you might be wondering why it’s so expensive. Buckle up because we’re about to tell you why.

What determines the cost of your Car Insurance premium?

Age and Gender

Your age and your gender may be considered by insurers when calculating your premiums.

In 2022, there were 1,194 deaths on the roads across Australia. 885 of which were male and 308 of which were female.¹ It’s these types of statistics that many insurers take into account when calculating premiums, and as a result, you may be required to pay a higher premium based on gender.²

Drivers under 25 are also statistically more likely to be in a car accident,³ and as a result, they also may be required to pay a higher premium on their Car Insurance.⁴

So, if you’re a 23-year-old male driver and you’re paying more for your Car Insurance than your friend who’s also 23 but female, this could be one reason why.

Location

Yep, believe it or not, but where your car is kept when you’re not driving it is something that insurers like to keep an eye on!

If your car is safely parked in a garage overnight rather than on the street, then your premiums could be lower as a result.⁵ But if you live in a busy suburb, you may have to pay a higher premium, as there tends to be more claims made in densely populated areas.⁶

Keep in mind that if you live in a suburb with a high crime rate, then your insurer may also consider this the next time they calculate your premium.⁷

Car Type

You can’t do much about your age (we wish!), but you can choose your car wisely if you want a cheaper insurance premium. Some cars are associated with street racing, while others simply cost more to repair or replace. Researching the cheapest cars to insure can help you keep insurance costs down.

You could consider the following features of your car to get an idea of how your insurer may assess your premiums:⁸

1. Value – The more expensive the car is, the more it could cost to replace.
   
   
2. Performance – Driving a souped-up sports car? You might want to keep an eye on those exxy premiums as modifications generally push up premiums.
   
   
3. Repairs – Have you got a Volkswagen Golf? Cars like these often require European parts, which can cost more to replace.
   
   
4. Theft – Is your car a model that’s commonly targeted by thieves, such as a Holden Commodore or Toyota Hilux?⁹ If it’s easy to break into or steal, your premiums could go up.
   
   
5. Safety features – Some good news! If you’ve got extra safety features in your car like an immobiliser or an alarm, you might be able to get a lower premium.

It’s not all doom and gloom. The moral of this story is: keep your car safe, drive safe and save!

Car Usage

How do you use your car? Is it just for work during the week and day trips on the weekends? Or are you planning on using it for a carshare platform?

Whatever the case may be, you need to disclose how you use your car to your insurer so they can accurately assess the level of risk your car will be exposed to on the roads.¹⁰

In addition to how your car is used, the number of kilometres you drive can also be taken into consideration when your insurer calculates your premium.

If you drive less than the average amount of kilometres per year, which is around 12,000 kilometres in Australia,¹¹ you may find policies that reward you with a cheaper premium for low-kilometre (less than 10,000) driving.¹²

However, if you drive much more than the average, your premiums could be higher. It’s possible that some insurers may limit your cover if you exceed the total kilometres you’ve advised or charge an additional excess.

Driving History

The way you drive can be a significant factor in the cost of your insurance premium. For example, if you have a no claims discount with your insurer and have an at-fault accident, your insurer will likely reduce your no claims discount, unless you have no claims discount protection.¹³ Plus, if you have a history of at-fault accidents, it’s possible that your premiums could get higher, too.

Insurers may choose to prioritise your driving history over some other factors, so if you have a less-than-perfect driving history, keeping your car secure and driving less often won’t necessarily lower your premiums.

Optional Extras

You might have some Extras attached to your Car Insurance policy. These Extras could include things like hire cars, reduced window glass excess, choice of repairer, or no claims discount protection.¹⁴

But did you know that these options aren’t always mandatory policy features? You can choose whether or not you’d like to keep them on your policy. So, if you’re keen to save some cash, it might be time to say goodbye to those optional Extras!

Excess

Each time you make a claim on your Car Insurance policy, you’re required to pay an excess. Insurers will often allow you to choose how much excess you’re comfortable with paying in the event you need to make a claim.

Keep in mind that the higher your excess, the lower your premium could be and vice versa.¹⁵

What else makes Car Insurance premiums increase?

No one wants their Car Insurance premiums to increase. After all, we’ve all got lots of other expenses to take care of at the same time!

Outside of changes in your personal circumstances such as moving house, your driving habits, the type of car you drive, and whether or not you’ve had to make any claims in the past, there is one other big factor that could also make your Car Insurance premiums go up rather than down.

And that big factor is you guessed it! Inflation.

Inflation is generally defined as the increase of many goods and services over a period of time.¹⁶ You may have heard people saying that the cost of living is becoming quite expensive – this increase in the cost of living is one result of inflation!

Inflation in the Car Insurance industry can be tied to many things, such as the increased costs of parts and repairs, pandemic-related supply chain issues which led to long delays in car imports, which can mean that more people still drive older cars that are more susceptible to breakdown and repair.¹⁷

Plus, in our relatively newfound ‘gig economy’, some of us may be looking for other ways to make money. For example, you might be using your car for business or a carsharing platform, which could also mean you may need to pay higher premiums.¹⁸

How can I reduce my Car Insurance premiums?

The good news is that you can in fact take a few simple steps that may drop down your premiums.

You can start with considering the following options:¹⁹

1. Buy online – some insurers may offer you a discount if you sign up online.
   
   
2. Set a driver age restriction – If you restrict your policy to drivers under 25, you could save some cash.
   
   
3. Increase your excess – If you have Comprehensive Car Insurance, you may choose to pay a higher excess to lower your premium.
   
   
4. Choose a low-kilometre policy – Some insurers offer the chance to insure your car for the kilometres you drive, so this could be a suitable option if your car spends more time in the garage than on the roads.
   
   
5. Pay for your Car Insurance annually – Some insurers will offer you lower premiums if you pay annually rather than each month or fortnight.
   
   
6. Be a safe driver – For each year you don’t make a claim, you might be eligible to receive a discount on your premium.
   
   
7. Avoid modifying your car – Keep your car as it is. If you make any modifications to your car and don’t disclose them to your insurer, your cover could be considered void.
   
   
8. Review your policy – It’s worth your while! Keeping an eye on premiums across other insurers is a great way to find a potentially cheaper policy that suits your circumstances.

Above all, be open and honest with your insurer to get a policy that meets your needs – you don’t want to find yourself unprotected when you really need it!

Looking for a better value Car Insurance premium?

With over 20 million motor vehicles on the road in Australia,²⁰ it’s clear that Car Insurance is essential. You can never predict when something might go wrong, so your best bet is finding the right policy for you and your car at a great price.

Get a list of comparable policies from our range of providers today using our quick and easy comparison tool to see if you’re getting a great deal on your Car Insurance policy.

^{Sources:
1 Australian Government Department of Infrastructure, Transport, Regional Development, Communications and The Arts - BITRE Road Trauma Australia 2022 Statistical Summary, page 8.
2 Budget Direct - How much does Car Insurance cost?
3 Moneysmart - Choosing car insurance
4 Budget Direct - How much does Car Insurance cost?
5 As above.
6 As above.
7 ABC - Insurance costs rise, regional Queenslanders say they’re paying the price for youth crime
8 Budget Direct - How much does Car Insurance cost?
9 Budget Direct - Car theft survey and statistics 2022
10 Budget Direct - Insuring your car, When taking out Car Insurance, what do I need to tell you?
11 Australian Bureau of Statistics - Survey of Motor Vehicle Use, Australia 2020
12 Budget Direct - Insuring your car, How do I buy a ‘low kilometres’ policy?
13 Budget Direct - Claiming on Car Insurance, If I make a claim, will I lose my no-claim bonus?
14 Budget Direct - Car Insurance Product Disclosure Statement, Part A, page i.
15 Budget Direct - How much does Car Insurance cost?
16 Moneysmart - Inflation
17 The Guardian - How to save on insurance as Australian firms hike premiums by up to 20%, 25 June 2023.
18 Budget Direct - Car Insurance Calculator
19 Budget Direct - How much does Car Insurance cost?
20 Australian Bureau of Statistics - Motor Vehicle Census Australia 2021}