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?

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?