How Does Car Insurance Pricing Work?
A whopping 51% of all motorists in the UK conclude that car insurance is too complicated to understand and when you begin to delve into how a quote is calculated, it’s not hard to see why.
Further fueling the confusion for some motorists is the fact that hey find themselves paying several times more than the value of their car for a single 12 month insurance policy.
On the face of it this might look like outright financial theft, but when you consider the fact that even a £100 car has the potential to cause serious harm or damage to other motorists and their cars or property and all the costs that an insurance company is likely to incur, it’s a little easier to not only make sense of, but to accept.
Overall the cost of your policy is based on how many people with a similar profile to you have made claims and how much the insurance company have had to pay out for those claims.
The COOP Insurance recently produced a fascinating video, which delves into how the cost of a car insurance policy is broken down, of course, this is based on their business model, but regardless of your insurer you can expect things to work out in a very similar way.
Here’s how things break down:
24% goes towards protection against injuries to others
Given the nature of car accidents, injuries do occur. From less serious inures such as whiplash to broken arms, legs and even more severe and potential life threatening injuries such as paralysis, a whopping 24% of the cost of an insurance policy is attributed to the cost of dealing with these.
18% goes towards damage to other peoples property
This 18% is is mainly attributed to repairing damage to cars, but can also include damage to other types of property. For example: if a car was to leave the road and instead of making contact with other cars, collide with a wall or even a building.
21% Towards the policy holders car
The percentage that’s allocated to the policy holder’s car is intended to cover damage following an accident, fire and even theft. This percentage of the cost may also be attributed to total loss claims where no damage is repaired as a result of the vehicle in question be marked as a write-off and instead a cash payout is made.
26% Towards operating costs
Operating a fully fledged insurance company is by no means cheap. There’s tons of costs that have to be covered, from legal and regulatory costs to underwriters, policy administrators, sales and customer service teams, there’s also the cost of operating premises, insurance and business rates. It’s therefore inevitable that a substantial chunk of the cost of an insurance policy will be swallowed up in this area.
Insurance companies are essentially profit making businesses and a per centage of the policy price is profit. In this case it’s 2%, but may differ slightly from one insurance company to another.
9% Insurance premium tax
Love em or hate em for it, the Government impose a 9% insurance premium tax on every car insurance policy sold in the UK. However, it’s worth noting that, in his March 2016 budget, George Osborne announced that the rate will increase to 10% as of 1 October this year, which will inevitably push the price of car insurance premiums up further.