How car insurance premiums are calculated

Car insurance probably isn’t something you spend your days thinking about, but it’s important to understand what it is and how it works to make sure you get the right coverage. Auto insurance rates are based on different factors, some of which you can control, and some of which you can’t. But if you understand what goes into establishing your insurance premium, you can make an informed decision.

Car insurance rates have been on the rise in recent years, for reasons ranging from theft to natural disasters. It can be reassuring to know that there are things you can do to help lower your expenses when you’re looking to purchase or renew your automobile insurance policy.

An auto insurance premium is the money you pay to an insurance company for financial protection for you and your vehicle in case of a collision or theft. Your insurance also covers bodily injuries caused to anyone not covered by a public plan. Monthly premiums are most common, though premiums can also be paid yearly.

The average cost of insurance in Canada varies a lot based on different factors, starting with where you live (it’s a big country!). Some general factors apply to everyone and are outside your control, like the economy or weather conditions where you live. But other factors are unique to you and your vehicle. 

While this isn’t a comprehensive list, let’s look at the types of factors that play into your insurance calculation.

The very first variable that can affect your premium is the type of vehicle you drive. The make, model and age of your vehicle, how much horsepower is under the hood, and the cost of replacement parts all factor into your premium calculation. Thieves tend to target vehicles like SUVs, 4X4s, trucks and luxury cars, so if you own one of these, your premium could reflect the higher risk. Expensive parts, luxury features and custom modifications can also bump up your costs, since they make your car more expensive to fix or replace.

Your driving record and your driving experience also affect your premium calculation. Insurance companies use your insurance history and driving history, including past accidents, traffic violations and insurance claims, to assess your risk. Newer drivers tend to have higher premiums, because they have less experience and are riskier to insure.

Do you use your vehicle for your job? Do you commute by car? If so, how long is the drive? How you use your car, the number of kilometres you put on it each year and the number of drivers listed on your policy can all affect the price of your insurance. 

Where you live plays a big role in your insurance rate, because different places have different levels of risk. Auto theft and collisions are more prevalent in certain neighbourhoods in big cities, while rural areas may have rougher roads and a higher risk of collisions with wildlife.

A deductible is the amount you have to pay before your insurance kicks in to fix your car if something happens to it. Your insurance covers the rest. A higher deductible means a lower premium, and vice versa. There’s no right or wrong decision when it comes to choosing a deductible, but you should pick an amount you’d be comfortable paying if you had to make a claim.

The auto coverage you choose also affects your insurance premium. While some types of coverage, such as damage to your car, are optional, there is always mandatory coverage you’re required to purchase. In Canada, at minimum you have to have liability insurance. If you’re in an accident, liability coverage is there to cover damages to the other person’s property or injuries that aren’t covered by a public insurance plan. You can add other types of coverage, such as collision, which helps pay to repair or replace your car if it’s damaged in an accident but remember: it will raise your overall insurance cost.

Sometimes, you’ll notice that your premium is higher at renewal time. Key factors that contribute to premium increases may include:

Inflation affects everything from the price of milk to the price of gas. It affects the cost of auto parts and the cost of labour to install those parts (how much someone charges to fix your vehicle). As these costs go up, insurance companies have to pay out more in claims for physical damage, resulting in higher premiums.

In addition to inflation, cars are becoming increasingly sophisticated. They now offer features like backup cameras and other driver assistance systems, which can be costly. This can drive up repair costs, affecting premiums. 

When claims go up, due to an increase in extreme weather, theft or any other reason, insurance companies have to pay out more money. To make sure they have enough cash on hand to cover these payouts, they have to adjust the amount of the premiums they collect.  

Extreme weather is on the rise, which can lead to increased damage claims. Hailstorms, hurricanes, tornadoes and wildfires can all damage vehicles, while severe blizzards and ice storms often result in more accidents. More claims means more payments by insurance companies, which in turn, leads to higher premiums.

Insurers also use statistics about vehicle theft to set automobile insurance rates. So if car thefts go up, insurance premiums may go up as well. In addition, if you drive a car that’s attractive to thieves, or if a lot of cars are stolen in your neighbourhood, your premiums may be higher.

Once you’ve established that you have the right coverage, you can look for other ways to save. If you want to save on auto insurance, you could:

• Insure two or more vehicles and benefit from the Multi-Vehicle Discount
• Bundle your home and auto insurance
• Sign up for Ajusto®

With the Ajusto program¹, you’ll get a 10% discount on your insurance for the first 6 months. The program uses your phone’s sensors to analyze your driving habits and could help you lower your premium. Check out our FAQ to learn more about it.

It’s totally natural for your needs to change over time. And because they do, it’s also important to make sure that your auto insurance policy keeps up with your changing needs. A growing family, a job change, a new home ... you may want to update your policy following any of these life changes.

Even if you haven’t had a major life change, it’s worth it to review your policy on a regular basis anyway. You may have wanted collision coverage when you bought a brand-new car, but if it’s on its last legs, you may want to consider dropping that coverage. Nobody expects you to review your coverage every week, but why not set a reminder to review it once a year?

A lot of factors go into calculating insurance premiums, and it can be hard to wrap your head around it all. It’s normal to have questions when you’re choosing or renewing your car insurance. Generally, the higher the risk and cost of a claim, the higher your premium will be. Getting clear answers to your questions about your insurance quote or policy can help you get a better handle on your premium and make smart choices. And if you’re in the market, why not ask for a car insurance quote? 

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¹Not available in all provinces. Certain conditions, exclusions and limitations may apply. Ajusto® is a registered trademark of Desjardins General Insurance Inc. The 10% discount is an enrollment discount. After 6 months, it will be replaced with a personalized premium, which can go up or down depending on your driving behaviours and habits. The discount and the personalized premium do not apply to certain endorsements or additional coverages.