Factors considered to calculate car insurance premium
Most people may choose to buy a car insurance policy in order to avoid paying fines to traffic cops. However, it is recommended that everyone get a car insurance policy not only so that they abide by the law but also because it offers financial protection in case the car is damaged. In case of damage caused by an accident or a disaster, policyholders will not have to shell out money from their pockets and the insurer will pay for the expenses incurred.
In return for the coverage, policyholders need to pay premiums towards the insurance company. The premium amount is estimated based on a number of factors as those mentioned below:
1) Insured Declared Value (IDV)
The IDV is the maximum amount that can be provided under the car insurance policy. The IDV is calculated based on the showroom price of the car. Also, any accessories fitted in the car such as a music system or speakers are taken into consideration while calculating the IDV. At the time of renewal, the IDV is adjusted based on wear and tear of the car and the accessories. The premium charged varies based on the IDV of a car.
2) Type of car
The model and variant of the car are taken into consideration while calculating the IDV. Details such as the cubic capacity of the car are of utmost importance while calculating the premium payable towards a third-party insurance policy. The higher the cubic capacity, the higher the premium.
3) Geographical region
The region in which the policyholder resides or the city in which the car will be mostly driven in is considered while calculating the car insurance premium. The premium is higher for cars in cities where the traffic congestion is high, the probability of the car being stolen is high or the probability of accidents is high. India has been divided into two zones – Zone A where the risk is high and Zone B where the risk is comparatively low. Major cities such as New Delhi, Chennai, Bengaluru, Hyderabad, etc., fall under Zone A.
4) Age of the car
The value of a car depreciates with time. This is because of the wear and tear of the vehicle and also because newer models are introduced in the market constantly. The insurance company decides the depreciation value based on the age and fix the premium accordingly.
5) Insurer and type of cover
The premium payable by a policyholder towards the policy depends on the insurance company one chooses. Each insurer fixes a different premium based on the features and services they offer. Also, the prices differ between third-party car insurance policies and comprehensive car insurance policies. Any extra riders such as the Personal Accident cover, Nil Depreciation cover, and Engine cover.
Every car owner is required to get a car insurance policy as per the Motor Vehicles Act, 1988. Anyone who does not have a car insurance copy while driving will be fined by the traffic police.
Financial Analyst at Farmer’s Insurance with over 25 years of experience in the Financial Industry