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How Car Insurance Premiums are Calculated
Here’s what you need to know about how car insurance premiums are calculated in Canada.
If you drive a car in Canada, you must have car insurance. And if you’ve ever bought car insurance, you’ve probably wondered how your car insurance premium is calculated. What exactly do insurers look at when calculating car insurance premiums? Read on to find out.
What is a car insurance premium?
A car insurance premium is the amount of money that you pay in exchange for the coverage of the car insurance policy that you choose. When you buy car insurance, you pay into a fund that'll help protect you financially. Depending on the type of coverage you choose, if you get into an accident, or your vehicle is damaged or stolen, your car insurance may help to cover the costs associated with:
- Medical expenses for injuries to the driver or passenger following an accident
- Repair or replacement of damaged vehicles
- Liability for injuries to other people or damage to their property
Insurers consider a number of factors—including your driving record, your vehicle, and even where you live—to estimate the likelihood of a future claim and how much that claim will cost. Ultimately, those considerations are used to calculate your car insurance premium.
How much is car insurance per month in Canada?
When it comes to the cost of car insurance, there's no one-size-fits-all answer to how much you'll pay each month. One driver's premiums might look completely different from another’s. For example, two drivers might live in the same city and drive the same make and model of car, but if the first driver has speeding tickets on their driving record and the second does not, the first driver will likely pay higher premiums. This is because your driving record is one of several factors insurers use to calculate your premium.
So, how do insurance companies calculate the cost of your monthly premium? Let's break down the key factors that influence your rate.
How is an auto insurance premium calculated?
Insurers consider a number of factors when calculating the cost of your premium. Some of these factors will have an impact on everyone, while other factors are based on your individual situation.
Factors that affect everyone's premiums
Among the things insurers take into consideration are several legal and economic factors that can have an impact on everyone's insurance costs. These could include:
- Significant increase in vehicle thefts across Canada
- Fluctuations in the rate of inflation
- Impact of more technologically advanced vehicles on car repair costs
- Rising costs associated with injuries
- Supply and demand challenges within the automotive industry
These types of legal and economic changes mean insurers are facing higher and more frequent payouts, which can impacts insurance premiums.
Individual factors that affect your premiums
Outside of these legal and economic factors, though, there are several other things insurers take into consideration when determining the cost of your premium, including:
- Your car
- Your location
- Your usage
- Your driving record
- How much you drive
- Your desired coverage
- Your deductible
The good news is, you can have more control over each of these factors. Here's what you need to know:
1. Your car
The make, model, and year of your vehicle can all affect your car insurance premium. For example, your premium may be lower if your car has been proven less likely to be involved in an accident or stolen. In addition, driving a vehicle with a solid reputation for its safety and handling characteristics, or a vehicle that's less expensive to repair or replace, could help reduce your car insurance costs. Insurers also consider how much it would cost to replace your car if it was stolen or damaged beyond repair.
Read Common Car Insurance Myths to find out if things like the colour of your car can impact your premium.
2. Where you live
In Canada, where you live can affect your car insurance premiums. Car insurance costs are generally higher in and around large urban areas due to a larger volume of accidents and theft or vandalism claims.
3. How You Use Your Vehicle
If you need to drive your vehicle for business purposes (beyond just commuting to work), you may need commercial car insurance coverage. That's because personal car insurance policies won't generally cover accidents, damage, or theft that occurs on a commercial vehicle, while commercial car insurance policies do—plus, commercial coverage typically provides a higher liability limit than what's usually available through personal car insurance policies.
4. Your Driving Record
Canadian car insurance companies look at your driving record when calculating your car insurance premium. Generally, the better your record, the lower your insurance premiums will be.
When reviewing your driving record, insurers will consider, for example:
- The number of years you’ve had your driver's license
- If you've had any convictions due to driving infractions, such as speeding tickets.
- The number of times you've been involved in an at-fault or partially at-fault accident
Don’t forget: Insurers also take into account the number of drivers who use your vehicle – and their driving records too – when calculating the cost of your car insurance.
5. How Much You Drive
When calculating your premium, insurers look at the number of kilometers you drive per year. Depending on how often you drive, you may be at an increased risk of being involved in an accident – and accidents can impact your insurance premium.
6. The coverage you choose
Your provincial or territorial government dictates the minimum amount of insurance you need to legally drive your vehicle. However, there are also optional coverage add-ons, or enhanced liability limits you can choose to purchase depending on your needs. The amount of car insurance coverage you have is an important choice, as it directly affects the level of protection afforded by your insurance policy and how much your car insurance will cost. Generally, the more coverage you have, the more it'll cost to insure your vehicle.
7. Your deductible.
If you want to lower your car insurance premium, you may want to increase your deductible. A deductible is the amount of money you have to pay towards a covered claim before your insurance covers the rest. For example, if you're in an at-fault accident that causes $5,000 worth of damage to your car, and your Collision deductible is $1,000 – you'll pay $1,000 towards the repair, and your insurer covers the remaining $4,000. Opting for a larger deductible could reduce the amount of your premium.
Why the cheapest car insurance isn't necessarily the right car insurance for your needs
Cheap car insurance can seem quite attractive at first glance but it's important to look beyond price when you're looking for the best car insurance for your needs. Low-cost car insurance policies often come with limited coverage—which means you might be left paying out of pocket in certain situations.
What's the best way to compare car insurance? Think about what kind of coverage makes sense for your specific circumstances. For example, do you need optional coverage such as collision or comprehensive coverage? Getting the right balance between cost and coverage is what really matters when it comes to helping keep you, your family, and your vehicle protected.
How much is insurance for a new driver?
If you're a new driver, car insurance will likely be on the pricier side, because Insurance companies consider less experienced drivers to be a higher risk—new drivers tend to be more likely to be involved in an accident. All the other factors, such as your age, location, and the kind of car you drive, will also influence your premiums, but for now, your lack of driving history could have a significant impact on your rates.
The good news? As you gain more driving experience and build up a solid driving history that demonstrates safe driving habits, you'll generally see your insurance costs improve over time.
Are there ways to reduce my car insurance premium?
To get the best value for your car insurance, make sure to check if you're eligible for any discounts or preferred rates. We can help you save if you:
- Are a university or college alumni, or a member of a professional organization (like engineers and accountants) or employer groups with preferred rates.
- Choose to bundle your car and home insurance.
- Drive a hybrid or electric vehicle.
- Have been claims free for over a year.
Interested in even more savings? Check out more simple tips to save on car insurance.
Additional FAQs
What happens to my automobile insurance premium after a car accident that I'm at fault for?
If you're the at-fault driver in an accident, your premiums will likely go up. A no-fault accident, on the other hand, will generally not have the same (or any) impact on your rates as an at-fault accident. But if you're involved in an accident, its always best to check with your insurance company to see how that accident might affect your policy.
What are some possible disadvantages of paying low premiums on car insurance?
Paying less for your insurance might seem like a win for your budget, but cheap insurance usually means a reduced level of coverage. This could potentially expose you to significant out-of-pocket costs if you're involved in a situation where you need to submit a claim.
Get a quote for car insurance online today
Now that you have a better understanding of how car insurance premiums are calculated, we hope you can get behind the wheel feeling confident in what you pay for your coverage.
Shopping for car insurance? It's easy to get a car insurance quote, customize your coverage, and buy online.
If you're an existing customer and have questions about your policy, please visit My Insurance or Contact Us.
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The content on this page is for general information purposes only and does not constitute legal advice. Coverages described herein may be subject to additional eligibility criteria, limitations and exclusions. In the event you make a claim, potential indemnification is also subject to the receivability of the claim and the type of coverage you bought.
In the case of conflict between the content on this page and your policy wordings, your policy wordings shall take precedence.