Everything You Need To Know About Car Insurance Premiums

Car insurance covers the vehicle owner against the financial loss(es) because of theft or accidental damage of the insured vehicle along with the legal liability that may arise due to Third party losses. The coverage is as per the terms and conditions stated in the policy document.

It is mandatory to have motor insurance if you own a car and the policy fulfills your legal liability that may arise because of physical loss/damage or damage caused to a third party.

What is Car Insurance Premium?

The simplest explanation can be – car insurance premium is the money you pay to your insurance provider for the insurance coverage. The mode of payment will be one time, at the time of obtaining the policy for the complete policy period.

The car insurance premium may vary in terms of cost, depending upon the insurance provider , the type of car, geographical location, the type of insurance cover you have opted for, add-on coverages, insurance policy deductible, and various other factors, including your driving record and even your age.

How Does Car Insurance Premium Work?

As a potential buyer of a new car or an owner of a vehicle, you should know that your vehicle must have valid insurance (comprehensive or third party only). Car insurance is essential to protect you financially when you are behind the wheel. Also, third-party insurance cover is compulsory for car owners under the Motor Vehicles Act, 1988. Typically, most car insurance policies are valid for a year. Thus, you need to pay an annual renewal premium to keep the policy active.

How Insurance Companies Calculate Your Car’s Coverage Premium?

Typically, there are several clauses in the fine print of your insurance policies—the general terms and conditions section, exclusions, etc. We rarely bother to read all the fine print and tend to focus on the highlights such as premium amount, insurance term, basic coverages provided by the policy, etc.

As the premium amount is the prime highlight while purchasing the policy, we tend to just compare the numbers without really understanding how the amount presented itself. Neither do we spare some time to understand how the insurance company calculates the amount.

There are a few factors that determine your car insurance premium.

• IDV – Insured Declared Value of the vehicle
• Age of the car 
• Car engine’s cubic capacity
• Geographical Zone
• Personal accident cover
• Other Add-ons
• Additional benefit/legal liability coverages

Let us look at the factors individually:

IDV or Insured Declared Value of Your Vehicle

The term IDV of the vehicle refers to the maximum claim amount your insurance provider will pay (less deductibles) if the damage to the car is ‘total loss’ or cost of repair exceeds 75% of the IDV. The same is also applicable in case your vehicle is stolen.

For instance, you purchase a new car with an IDV of INR 12 lakh at the time of buying the policy. Now the insurer can disburse a maximum amount of INR 12 lakh less deductibles in case of any Total Loss or theft for valid and admissible claim.

Motor insurance policies are indemnity based policies, i.e., you will be compensated for an amount up to the damage of your car subject to the maximum upto the IDV of the policy. When you purchase a new car and buy an insurance policy, the insurance company decides the IDV based on the ex-showroom price and the depreciation as per the India Motor Tariff (IMT).

Now, the value of your vehicle starts depreciating every year as per the depreciation slab outlined in IMT. Hence, if the IDV of your car is low, the insurance premium will also come down. It’s advisable to select the proper IDV depending upon the age and ex-showroom price of the vehicle so that the vehicle will be insured with adequate coverage.

For example, when you purchase a new car, its value will be greater than a four-year old car. The insured declared value or IDV is the value that has been decided for your car to calculate its worth at the time of the claim & to compute the premium accordingly.

In case you have any additional accessories installed in your car, say a high-end music system or speaker, the value of those accessories will be added to the IDV separately. Then at the time of renewal, the price will be adjusted for any depreciation to the car and the accessories. Suppose you are purchasing an insurance cover for a car that is over five years old. In that case, the IDV will be determined based on an understanding between you and the insurance provider after adjusting the value after depreciation.

Here is the formula to calculate IDV in insurance:

IDV= (Manufacturer’s listed selling price – depreciation) + (Accessories not included in listed selling price – depreciation) excluding registration and insurance costs.

Please note that the IDV calculation applies only for the Own damage section of the insurance policy and not on the statutory third-party coverage.

Sometimes the insurer quotes a low premium by artificially reducing the IDV and you need to be watchful on this front.

Age of the Car

As your vehicle grows old, it starts losing value due to various reasons. Moreover, the launch of newer models further reduces the price of your car. The primary reason for the value depreciation is the general wear and tear of the vehicle compared to the new model. Insurance companies have a set schedule that applies to vehicles and their market value depending on the age. The schedule is independent of the brand of the vehicle. Typically, the schedule looks like this:

Engine’s Cubic Capacity 

Every car’s engine size is measured as per its cubic capacity. The size of your car’s engine has a considerable impact on how much insurance premium you will be charged for your Insurance cover. Typically, the premium amount in a third-party insurance cover is similar for both new and old cars. This is because the premium is linked to the size of the engine instead of the overall age of the car.

Given below are the three categories as per India Motor Tariff for vehicle cubic capacity:

Geographical Zone

The insurance premium that you pay for your car depends on the city of registration of your vehicle. The Motor India Tariff divides the geographical categorization into two zones – Zone A and Zone B.

Zone A includes Ahmedabad, Hyderabad, Mumbai, Pune, New Delhi, Chennai, and Bengaluru. The vehicles in these cities are assumed to be more prone to accidents and theft. Zone B includes the rest of India. The insurance premium for cars in Zone A is higher than that in Zone B.

Third-Party Coverage

In India, it is compulsory to have third-party coverage if you own a car. The coverage protects you from financial claims for any damage to property or person by your insured vehicle in case of an accident. However, the third-party liability (TP) cover does not include any compensation for any loss to the Insured’s vehicle The premium for TP cover depends upon the cubic capacity of the vehicle and is fixed by the Insurance regulator, IRDAI.

Own Damage (OD) Cover

Generally, the own damage cover is optional while purchasing car insurance. However, it is highly beneficial and advisable. It helps you cover your car’s repair expenses in case of damages due to the perils covered under the Insurance policy such as fire, earthquakes, accident, flood etc. If the IDV of your vehicle is higher, the premium amount is also higher, and vice versa.

Personal Accident Cover for Owner Driver And Others

This particular component of your vehicle insurance premium goes a step above and protects you. The policy offers compensation against accidents, death, and disability to owner drive up to a sum Insured of INR 15 lakh.

You can also choose to opt for personal accident covers with variable sum insured as allowed in India Motor Tariff to include passengers that may be travelling in your vehicle. The premium thus goes higher as the sum assured increases.

Other Add-on Coverages

The last factor that influences your car insurance premium is the add-on coverages. Add-ons are the additional coverages for you to opt for a more comprehensive insurance cover. There are different types of add-ons, such as covering the depreciation applicable at the time of claims, engine damage that may occur due to flooding etc., emergency roadside assistance and many more.

Each particular add-on makes your insurance more robust and ensures a comprehensive cover. As you opt for more add-on, the premium amount will factor in all those and will thus go higher.

As we can see, multiple factors define the car insurance premium. The amount varies from person to person and also depends upon the combination of the factors mentioned above. The bottom line is choosing the right car insurance cover that offers a comprehensive cover and ensures all-inclusive protection against financial losses.