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How Car Insurance Premium is calculated and how to reduce it?

How Car Insurance Premium is calculated and how to reduce it

When you buy a new car, you need to buy a car insurance plan. Agents sitting at car showroom give you a premium number based on which majority of the individuals would opt a car insurance plan. Car insurance premium is computed based on several factors. If you understand them, you can take steps to reduce the car insurance premium during renewals. How Car Insurance Premium is calculated? Is there any way we can reduce car insurance premium?

What is Car Insurance Plan?


Car Insurance in simple terms provides financial assistance to third parties as well as to the car in case of accident, theft or burglary.

A simple dent on a car costs thousands of rupees to repair it.  Hence it is important that one need to buy car insurance to protect from high repair costs.

Types of Car Insurance Plans


Understanding various types of car insurance plans would help you to consider relevant plans with ideal premium.

Basically, there are only two types of car insurance plans i.e. Third party car insurance and comprehensive car insurance plan. However, these are categorized by insurance companies in various forms like:

1) Third Party liability coverage

2) Comprehensive coverage

3) Collision Coverage

4) Personal Injury coverage

5) Uninsured motorist protection

What is the formula for car insurance premium calculation?


Car insurance is calculated as below:

Step-1 – Compute Insured Declared Value (IDV)

Insured Declared value = Showroom price of the car + cost of accessories – depreciation value (as per IRDA calculations)

Step-2 – Calculate car insurance premium

Car Insurance Premium = (IDV x Premium Rate (decided by car insurer)) + Add-Ons coverage – Discounts / NCB / Benefits

What factors determine Car Insurance premium calculation?


While there are different types of car insurance plans, car insurance premiums would depend on a few key factors.

1) Car Owner’s age

 Do you know that if car owner age is < 25 then premiums are high? Insurance companies believe that any individual in the age group of 18 to 25 years is less experienced in driving and likely to have road accidents, hence they charge higher premiums for this age group.

2) Fuel Type

Insurance premiums for CNG fitted vehicle are high compared to petrol or diesel vehicles.

3) Geographical Location

Car insurance premium calculation would impact with the location of the car being driven.  Insurance companies charge high premiums for vehicles driven in Metro city / urban cities where there is high traffic compared to rural areas where there is less traffic and less chances of accidents. If you are planning to drive the car in towns and rural areas, it is advisable to register the vehicle in the local area where car insurance premiums are low.

4) Car capacity

Car insurance premium also depends on car cubic capacity. Along with this car’s brand, year of make, model and variant is also considered for car insurance premium.

5) Insured Declared Value (IDV)

Insured declared value is also considered for insurance premium calculations. Insured declared value is the maximum amount an insurer pays to policyholder in case of accident of theft. Higher the IDV, higher the premium and vice versa.

5) Manufacturing Year

Car manufacturing year is considered for insurance premium calculations. Higher the age of the car, lower the value of the car and hence car insurance premium also would be lower.

6) No Claim Bonus

In the first year of car insurance, there would not be any NCB. However, when years go by, if there are no claims for the previous year, the insurance company would provide no claim bonus (NCB) benefit in the form of discount on the car insurance premium. If you do not have any claims in previous years, your net premium would be low during renewal. Hence driving your car by following all rules and guidelines would not only help to avoid any accidents, but also help to get NCB benefit which can lower your car insurance premium.

6) Discounts for anti-theft security devices

If your car is equipped with anti-theft security devices, insurance companies would provide additional discount and reduce your car insurance premium.

Sample Car Insurance premium computations


Let us take one example on how car insurance premiums are calculated.

Mr. Rajesh has purchased Suzuki Baleno in 2021 with the following details:

  • Fuel Type: Petrol
  • Engine Capacity: 1197 cc
  • Registration: Hyderabad
  • Year of purchase: 2021
  • Tenure: 1 Year

With above details, the car insurance premium would be approximately:

1) Third Party Insurance – Rs 3,200

2) Standalone own damage plan only – Rs 3,000

3) Comprehensive car insurance plans – Rs 6,200

5 Ways to reduce car insurance premium


Here is a quick list of things which can help you to reduce car insurance premium year on year.

1) Avoid small claims (if possible). This would help you to get no claim bonus in the form of discount for your car insurance premium.

2) Anti-Theft devices provides safety to your car and also reduce car insurance premiums.

3) Purchase Car Insurance online and avoid agents and middlemen. This would help you to get better and lower rate for car insurance.

4) Renew car insurance well ahead of the policy expiry date. In case policy is expired, the insurance company would not issue the policy online. They need to inspect physically and then issue policy offline. You may need to pay higher premium for offline plans.

5) Transfer NCB to new cars when switching the cars. If you are disposing old car and buying a new car, ensure no claim bonus is transferred to your new car. The reason is that no claim bonus is given to the person and not to car. You have earned this when driving an old car by avoiding the accidents, hence you should move it to the new car and enjoy this benefit.

Suresh KP

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