Premiums, Pricing and Rates - An explanation of how car insurance premiums are calculated

How much??

Car Insurance is a pool or 'common fund’ into which the car insuring public pays a premium commensurate with the risk or their car to the fund - basically, the higher the risk the higher the car insurance premium.

It is from this pool or fund that insured losses are paid as Claims - so that the loss falls lightly upon the shoulders of the many, rather than heavily upon the shoulders of a few.


These principles apply as much to car insurance as any other class of insurance, and it is the duty of car insurance underwriters to assess the risk factors which must be taken into account and to decide the appropriate premium and terms for the insurance on the basis of these factors. These factors are quantified as rating factors and rating tables.

Computerized car insurance systems found on the Internet self underwrite and calculate the premium from rating tables held on the computer's rating database.

Standard Risks

The Car Insurance underwriter now has at his disposal the statistical experience of his company and modern computerized systems have greatly expanded the range and amount of data available to the underwriter or computer quotation system in making underwriting and premium decisions regarding a particular car insurance risk. If a particular car or person falls within the parameters of a car insurance company's rating model then this will be considered a standard risk and a premium can be calculated and cover offered.

Non Standard Risks

However there are many underwriting exclusions from the standard model that Internet car insurance systems are based around, and these customers will need to approach a specialized car insurance broker to find cover.

When underwriting non standard risks which fall outside the online system standard capabilities, the specialist car insurance underwriter will also have at his disposal his personal experience of car insurance, and occasionally perhaps his prejudices, likes and dislikes.

This rather unscientific combination of prerequisites may not be ideal for a car insurance system but it is interesting to note that many of the smaller car insurance accounts which are individually underwritten tend to be much more selective and profitable than larger car insurance accounts and systems which are underwritten on statistical information with little flexibility for non standard customers.

Much pressure has been brought to bear in favour or 'mass production' car insurance underwriting techniques and procedures, with little room for variation or special treatment, so that insurers' administrative expenses which are always open to public and governmental criticism - may be minimised. 


Rating Information - Proposal forms - the data basis for rating

The information obtained from a proposer for car insurance on a proposal or quotation form is designed to throw as much light as possible on the potential risk, or the 'exposure' , to which the car insurers may be committing themselves; the physical and moral hazards inherent in any particular risk must be properly considered so that an adequate premium and the right terms may be quoted. If you make a claim, the data supplied on your proposal form will be used to validate the claim.

Rating Factors - the basis of rating

For the greater part of its existence the Car insurance industry has adopted a more or less uniform attitude and approach to the factors which are taken into account in deciding the basic premium for a particular private car risk. The car insurance rating factors commonly used are:

  • Usage - The type of use to which the car is put, including annual mileage.
  • Type of car - Cars are sorted into rating groups depending upon engine size. Other factors concerning the car include age of the vehicle
  • Location - The Postcode where the car is normally kept.
  • Type of Cover required - Comprehensive , TPFT etc.
  • The Driver - Factors concerning the driver include: the age of insured and/or regular driver, the number of years driving experience, occupation of the driver and the sex of the driver. 

A combination of rates for the above factors and others will be used to calculate the premium you pay. 

A basic rate will be applied using the above factors to calculate a premium which will then be loaded or discounted depending upon the following factors

Loads - Claims in the past five years, convictions, modifications and extensions of basic cover

Discounts - Security devices fitted, overnight parking and garaging, no claims discount earned and voluntary excess for claims.

Rating and Underwriting Data sources

The following data sources used are used in underwriting Car Insurance using computers and Internet quotation forms. The data prevents time consuming rekeying and calculations and cuts the costs of production of Car Insurance:


The data collected from the quote / proposal form.

  • DVLC – Car data, make model size colour etc is automatically imported into the car insurance computer application to assist rating and print cover documents. 
  • CUE – The Claims Underwriting Exchange – All Insurance companies pass data to and from the CUE on a daily basis. This has dramatically reduced car insurance fraud. 
  • MIAFTA - Motor Insurance Anti-fraud and Theft Register, A register that logs all total loss and theft of vehicle claims on computer at the Association of British Insurer’s office. Both companies and Lloyd’s participate in the scheme which assists in the tracing and recovery of vehicles. 
  • Experian & Credit Agencies – Many Car Insurance companies now use personal data bought from Experian and other credit agencies. The ‘unlikely’ theory is that if you have a poor credit score your are more likely to claim. 

Postcode Rating systems – the rates are allocated to Postcodes, so car insurance risks are always heavily influenced by the cars permanent location.

Internal historical records within the Car Insurance company usually stored on large mainframe systems or IBM AS/400’s. Client and customer records can be imported straight into the Car insurance computer application using address or name as a keyword. Discounts may be offered if you use the companies other Bank / Assurance products. 

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