Car insurance is a crucial aspect of responsible vehicle ownership, providing financial protection against potential accidents, damages, and liabilities. A common question is why car insurance premiums often remain the same even as the value of a car depreciates over time. In this article, we tale a look at factors that affect your car insurance premium.
Factors that affect car insurance premiums
While the present value of your car does influence premiums to a large degree, it is not the sole determining factor when calculating insurance costs. Additional factors such as repair costs and the risk profile of the driver play significant roles as well. Insurers consider the overall risk associated with a particular make and model, taking into account historical data on accident rates, repair costs, and theft rates.
Here's a more detailed look at the factors that influence car insurance premiums:
Claim Frequency and Severity: Insurance companies base their premiums on historical data related to claim frequency and severity. If there has been an increase in the number or cost of claims, insurers may adjust premiums accordingly.
Liability remains the same: Irrespective of how old your car is, the damage it can cause remains the same. Old or new, the liability of the insurance company in the event of a crash remains the same, and therefore, the premiums do not change significantly with time.
Inflation and Repair Costs: While the value of a car may decrease, the cost of repairing or replacing parts may not necessarily decline at the same rate. Modern cars often include advanced technologies and expensive components, and therefore, the cost of repairs can remain high despite the depreciation of the vehicle. Consequently, insurance companies consider the potential expenses associated with repairs when determining premiums.
Changes in Coverage and Deductibles: Policyholders may choose to change their coverage levels or deductibles from year to year. A decrease in coverage or an increase in deductibles could lead to a decrease in premiums, while the opposite would increase them.
Economic Factors: Economic conditions can play a role in car insurance premiums. During an economic downturn, people might cut back on insurance coverage, leading to changes in risk profiles and premium calculations.
Demographic Factors: Demographics, such as age, gender, location, and driving history, influence insurance rates. As the demographics of policyholders change, so might the premiums.
Impact of IDV on your insurance premium
Every year when you renew your car insurance, the insurance company calculates the IDV (Insured Declared Value) based on the car's age and depreciation. As your car gets older, its IDV decreases because its value in the market also goes down due to wear and tear.
In simple terms, IDV in motor insurance is the approximate current market value of your car. It is the maximum amount that an insurance company will pay you if your car gets stolen or completely damaged beyond repair in an accident.
Remember, IDV is not the same as the purchase price of your car when it was new; it reflects the current value in the market after accounting for depreciation.
Now, remember when we said insurance premium depends on a host of factors other than the car's current value? While the car's value may be depreciating, it has no bearing on the other standalone factors discussed above. This is why your car's current value only impacts insurance premiums to a certain extent. With all the other factors combined, your car insurance premium either increases or remains constant.
That being said, there are certain ways that you can ensure lower premiums.
How to secure lower premiums on your Car insurance
Maintain a Clean Driving Record: A good driving history with no accidents or traffic violations can help you qualify for lower premiums as it indicates you are a low-risk driver.
Utilise No-Claim Bonus (NCB): If you have not made any claims in the previous policy year, you can accumulate NCB, which leads to a reduced premium when renewing your car insurance in India.
Install Safety Features: Equipping your car with safety features like anti-theft devices and airbags may make you eligible for discounts and result in a lower premium, given that the risk of liability decreases.
Compare Quotes: Obtain car insurance quotes from multiple insurers in India. Comparing rates allows you to identify the most competitive premium for the coverage you need.
Policies Tailored for Older Vehicles: When you renew your motor insurance, some insurance companies may offer policies specifically tailored for older vehicles. These policies may account for the depreciated value of your car and provide lower premiums accordingly.
If you believe your car's value has depreciated significantly and the premiums are not reasonable, check with your insurance provider to explore all your options.
In conclusion
Car insurance premiums remain relatively stable despite the depreciation of a vehicle's value over time due to the intricate assessment of multiple risk factors involved in the premium calculation process. While the age of the car does impact insurance premiums, it is just one component among many. Insurance companies prioritise risk assessment, repair costs, liability coverage, and other relevant factors when determining premiums.
While some insurers may offer policies considering the car's depreciated value during motor insurance renewal, the overall impact of depreciation on premiums is relatively limited. Insurance companies aim to provide comprehensive coverage that reflects the potential risks and expenses associated with insuring a vehicle, ensuring you are adequately protected under the provisions of the Motor Vehicles Act of 1988.
