How car insurance works

We all hate the hassle of tracking down decent insurance cover, but sadly it’s a necessary evil. You might think you’re not going to crash, but how do you know that your car won’t be nicked or that some idiot won’t pile into you, then drive off?

The whole point of insurance is that it’s to cover you for whatever life throws at you – and unless you can see into the future, you don’t know what that might be.

If you were given £2000 on the basis that you might have to fork out a couple of million pounds because of somebody’s carelessness, would you take the risk?

How are car insurance costs are calculated?

Insurance works in a very straightforward way; the company underwriting the policy will work out the likelihood of the policyholder making a claim, and charge accordingly.

Their aim is to ensure that at the end of each year, the amount paid into the pot by all their customers will equal more than the money taken out by those making a claim. It’s inevitable that some customers will make a claim and the company will have to pay out; their plan is to ensure that taking their customer base as a whole, they’re ultimately ahead financially.

To stay on the right side of the law, you need third-party insurance at the very least – but if your car is worth more than £2000 you really ought to go for comprehensive cover. This sometimes costs little more than the lower level of cover, but gives you far greater protection. However, if you’re on a tight budget, you may have little choice as to how you insure your car…

Something that frequently seems unfair is a £2000 premium on a £500 car; an issue that many young drivers have to contend with. The thing is, the value of the car being insured is immaterial; with third party insurance only, it won’t even be covered.

But what happens if the driver of that car smashes into a Bentley, causing serious damage to the car and its occupants? A couple of heavy personal injury claims won’t be cheap; if you were given £2000 on the basis that you might have to fork out a couple of million pounds because of somebody’s carelessness, would you take the risk?

When your insurance premium is calculated, your insurer takes a whole load of factors into account, each one helping them to work out how likely you are to make a claim. This is what’s taken into account, and why:

  • Where you live: some areas have higher theft rates than others.
  • Age: there’s no substitute for experience to reduce the likelihood of an accident.
  • Driving history: if you’ve spent the last year crashing into things, there’s a good chance you’ll continue to do so.
  • Occupation: lawyers and doctors are a safe bet; journalists and film stars aren’t. How you earn a living radically affects the risk you pose, so if in doubt just become an accountant.
  • Licence cleanliness: is your licence loaded with points? If so, you clearly have problems obeying laws; insurance companies don’t like law breakers.
  • Annual mileage: the more you drive, the greater the risk of you having an accident. Keep your annual mileage down and you can reduce your premium accordingly.
  • Security: if no alarm or immobiliser is fitted, there’s a good chance your car will walk. Fit some sort of security system, your car will stay where you leave it and there’ll be no claim made. Everyone’s a winner.
  • Where the car is kept: insurance companies like garages, or at least off-street parking. Leave your car in the road and you’ll pay more.
  • Who drives it: allow the world and his wife to drive your car and you’ll get charged accordingly. Restrict cover only to those who really need it.
  • Value of the car: the higher the value of the car, the more it’ll cost to insure. It really is that simple.
  • Type of cover: comprehensive cover costs more than third party, fire and theft. If your car is almost worthless, don’t insure it comprehensively – but shop around and you might be able to insure it comprehensively for the same money that someone else is charging for just basic cover.
  • Usage: insurance companies don’t like vehicles being used for business use. So restrict its use to social, domestic and pleasure for a lower premium.
  • Left or right-hand drive: insurance companies don’t like British drivers running left-hand drive cars; they like the steering wheel on the right.

How can you save money on car insurance?

Unfortunately, as a new driver you are a high risk, and if you want to know just how high, you can check out a few key facts and figures here.

The main issue for you as a new driver is your lack of experience and if you’re a young driver, your age. While you can’t change your age (and don’t even consider lying, or you won’t be covered in the event of a claim), there are other ways you can cut the cost of your insurance. These are the key ones:

  • Shop around to get the best price and deal. And make sure you do this every year; don’t stick with your insurer just because they gave you the best deal the last time.
  • Try to price match, playing off one insurer against another. If you make it clear that you can get a better deal elsewhere, you might see costs cut.
  • Leave your car standard; insurers don’t like big stereos, spoilers and flash wheels.
  • Don’t claim for small things; you need to build up a no-claims bonus. Besides, you’ll probably have a large excess imposed on you anyway.
  • Consider a larger excess, but don’t get carried away; in the event of a claim, would you be able to fulfil your obligation?
  • Use a specialist insurance company if you drive something unusual such as a kit or classic car.
  • Think about investing in some security, to help ensure your car isn’t stolen.
  • Look at both conventional insurance policies as well as black box (or telematics) cover.
  • Put a parent on your policy; it can see costs plummet. But whatever you do, don’t get involved in fronting.