How your car insurance rate is calculated

An explanation of how car insurance quotes are calculated by insurance companies.

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car insurance calculation

Ever wondered why you can get multiple car insurance quotes from different companies, all with different prices? Well, it's simply down to the underwriting algorithm used by each provider.

The car insurance quotation process

When getting a quote you are asked a ton of questions about where you live, your car, previous claims history and various information about any additional drivers you want added to the policy.

The answers you give to each of these questions can affect your quote by either applying a discount or an increase. How much it changes the price is pre-determined by the rules and rating tables the underwriter has incorporated into the rating algorithm for that product.

Each insurance company will have their own rating criteria for each of the answers you give.

Insurance Rating Factors

The questions you're asked during the quotation process are referred to by underwriters as 'Rating Factors'. In total, there are around 40 rating factors that companies tend to use which affect the cost.

However, some rating factors are more important than others in terms of how they affect your final quote or insurance premium as it is known.

There are around five or six main rating factors:

1. No Claims Discount

Often referred to as NCD or NCB (No Claims Bonus), this number relates to how many consecutive years you have had car insurance without making a claim. This is often the most significant factor and can attract large discounts of up to 70% or more for those with the maximum amount.

On the other hand those who don't have any NCD years, usually because of previous claims or being a new driver, will often find their premium increased significantly.

It stands to reason that if you look at it from an underwriting perspective, the more NCD years a customer has, the better risk they are. This is obviously because insurance companies prefer customers who don't claim. Whereas a person with little or no NCD will be seen as a higher risk due to either a lack of driving experience or because they have claimed in the past.

Insurance companies will always ask for proof of your NCD such as a copy of your latest renewal letter from your current insurer.

2. Vehicle Make and Model

With so many different vehicles on the road, it would be impractical for underwriters to create a rate for each one. Instead, they divide them up into one of 50 groups, with Group number 1 being the least risky and Group 50 being the highest and often attracting a hefty premium.

Each of the 50 groups is allocated a rate or multiplier that gets added to your quote. The higher the vehicle group, the higher the rate is likely to be.

The reason for this is that higher grouped cars are seen as a worse risk for the insurer due to things like them being more expensive and having a bigger engine. Someone who buys a car with a large engine will more likely drive faster and thus be seen by the insurer as a bad risk.

Lower grouped cars on the other hand are deemed safer in terms of their reduced value and smaller engine size. Lower speeds means less chance for accidents, which in turn is good for the insurance provider.

The majority of insurers will automatically get your exact make and model, including the group number, from the registration plate you supply during the quote stage. Insurers link to the DVLA to pick up this data.

So, the next time you buy a new car, always take into account it's insurance group number to help you budget for your motor insurance cost.

3. Age of Driver

By their very nature, young drivers have little or no experience behind the wheel and this is born out with industry statistics that show young drivers have more accidents.

It is understandable therefore that young drivers present a significantly higher risk to insurance companies. The majority of companies will inevitably apply higher rates to teens and young drivers.

Insurance companies view people aged 30+ as better risks due to their perceived stable lifestyle and will often attract a discounted rate. In addition to having more driving experience, older drivers are less likely to be speeding, are seen as more family orientated and are therefore better aware of the risks involved in driving erratically.

In order to get around higher prices, some parents will often add themselves as the main driver and then add their teenage son or daughter as a named driver. This is called fronting and is illegal. You could get fined and even banned from driving.

4. Where you live

The address you give as to where your car is kept will be rated by underwriters as being either a low or high risk area.

Insurance companies will take your full postcode and assign a rating next to it. This rating is generally based on the crime levels in your area and the chance of your vehicle being broken into or stolen.

Generally speaking, inner city locations are viewed as high risk areas by insurers, whereas out of town areas and countryside locations may be looked upon more favourably and receive cheaper rates.

Your postcode may also be used by underwriters to plug into a lifestyle rating table. Lifestyle tables group postcodes by the sort of people that live there and include such things as your spending habits, family life, newspapers you read and things that interest you. Although not perfect, lifestyle rating attempts to determine what sort of person you are in terms of being a high or low risk customer.

5. Driving convictions

You must declare on your car insurance quote any driving convictions or endorsements that either you or any of your named drivers have.

Insurance underwriters look favourably on people with no convictions and may even apply a discounted rate in order to attract those customers. However, even a simple SP30 speeding endorsement code will likely mean an increase in your premium.

Underwriters apply a rate to the severity of each conviction type and may also apply additional costs for having multiple driving convictions. They may tot up various speeding convictions to increase your premium even higher.

For more serious convictions such as 'DR' drink driving codes, you may find it hard to get insurance at all. Companies will naturally see you as a bad risk for them and either refuse to give you a quote or apply a hefty increase to your quote.

The bottom line here is that the cost of your driving conviction doesn't just end with any fine you get. The increase it has on your car insurance premium or renewal quote can often be even more significant.

6. Other rating factors

The rating factors above are generally seen as the primary ones that affect your premium the most. However, on top of these are potentially another 20 different underwriting rating tables that change the cost of your quote up or down a smaller amount.

These factors include things such as your occupation, marital status, voluntary excess, credit score, how long you've owned the car, where your car is parked overnight, what security your car has, how valuable your car is, access to other vehicles and details of any named drivers.

All of these factors are automatically calculated and applied to your quote once you've finished entering your details.

Honesty is the best policy

Some people think they can be clever and 'cheat' the system with false information in order to get a cheap quote. However, not only is it illegal to provide false information to your insurance company, you will likely find that in the event of an accident or claim, the insurance company will declare your policy void and refuse to pay out anyway.

Knowingly giving wrong information in this way could also get you a heavy fine, banned from driving and a court appearance. Always be honest when filling out a car insurance quotation form and always inform your insurance company if your circumstances change, if you've picked up a driving conviction or if you've had any type of accident, no matter how minor.

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