Calculating car insurance premiums

Reviewed by Daniel Mirkovic

Updated April 26, 2024

The price of car insurance is a subject that weighs heavily on many Canadians’ minds. For some, it’s one of the largest expenses in their monthly budget; for others, car insurance is surprisingly affordable.

What makes insuring a sedan in Vancouver so different from insuring a pickup truck in Toronto? Why do car insurance premiums vary so much for different drivers, cars, and cities?

Here, we’ll explain what car insurance premiums are, how they’re calculated, and how making claims affects your premiums.

Thumbnail showing the speedometer in a car

What are car insurance premiums?

Insurance policies cost money, and auto insurance is no exception. The money you pay in exchange for insurance coverage is known as the premium.

Usually, drivers buy auto insurance one year at a time. Most providers offer the option to pay their annual premiums all at once, or in monthly installments. Those who can afford the lump sum sometimes receive a discount for paying the full year at once.

Of course, if you cancel your car insurance policy before the term you’ve paid for is over, you’ll receive a refund. But, there’s usually a cost associated cancelling a policy mid-term. That cost ranges from a small fee to some percentage of the annual premium, so pay attention to the cancellation terms when you buy a policy.

How are car insurance premiums calculated?

Car insurance (or any insurance) is priced according to the insurer’s risk involved in offering the policy. The greater the risk to the insurer, the higher the price.

The risk, in this case, is the risk of having to pay a claim settlement. Of course, insurers expect to pay claims—that’s why they exist. But not every policy carries the same risk. A car that drives 100,000 kilometres in a year has a much greater chance of being in a collision than a car that drives just 500 kilometres.

Risks are rated based on frequency and severity. Losses with a high likelihood of occurring are risky, as are losses that would be expensive to cover (even if they’re unlikely).

With that in mind, there are dozens of factors that influence risk, and therefore influence car insurance premiums:

The insured vehicle

Obviously, the vehicle that you’re insuring is a major factor when it comes calculating the cost of insurance. Vehicles come in all shapes and sizes, ranging from compact hatchbacks to 4WD pickup trucks to mid-engine sportscars.

Much of the premium for insuring a vehicle is based on the vehicle’s repair or replacement costs. If the car suffers damage in a collision or other loss, insurance will cover the cost of repairing the vehicle, or paying the owner its cash value in the case of a total loss.

When it comes to repairs, not every vehicle is created equal. Common makes and models are usually more affordable to repair than rare, imported vehicles. New vehicles, full of sensors and cameras, are often very expensive to repair even after a minor collision.

When you’re car shopping, you can check some insurance rating factors yourself to see how your potential vehicle measures up against others. The Insurance Bureau of Canada publishes vehicle rankings based on claims data. These rankings show how different makes and models compare when it comes to comprehensive, collision, or direct compensation property damage (DCPD) claims. A vehicle that scores well in every category may be more affordable to insure.

Finally, some insurers offer discounts if your vehicle has special safety features or anti-theft devices.

Vehicle usage and location

In addition to the vehicle itself, the way you use it also affects auto insurance premiums.

More driving means more time on the road, which means a greater chance of being involved in an accident. This is true whether or not you’re a good driver; when on the road, you are also at the mercy of road conditions and other drivers’ behaviour.

When you buy a car insurance policy, you’ll have to specify how you use the vehicle. Sometimes, it’s as easy as choosing an option from a short list that includes things like “pleasure use” or “commuting further than 10 kilometres.”

Other times, your insurance premiums will be directly based on how many kilometres you drive in a year. Some insurance providers offer usage-based insurance, also known as telematics. If you sign up for such a program, your insurer will track your driving, either via a tracking device installed in your car or via a mobile app. Either way, your insurance rates will adjust to your distance driven and other driving habits. Usage-based insurance is not available everywhere, though it is growing in popularity.

Your location also impacts your premiums. Urban areas have more traffic (and thus higher accident rates) than rural areas. Theft is also a greater concern in urban areas, and even in small areas within an urban zone. Accordingly, insurance rates are often higher in cities. Many insurers rate neighbourhoods or postal codes separately, so people even within the same city can pay different rates based on their location.

Personal characteristics

Insurance providers use several personal characteristics to help set their rates. Each person listed as a driver on the policy will influence the final calculation.

While every insurer is different, here are some of the most common personal factors:

  • Age. Experienced drivers have fewer accidents, on average, than young drivers. Thus, many insurance providers offer a discount for older drivers, or add a surcharge for young drivers.
  • Driving history. A long history of driving with no accidents or traffic violations strongly predicts that a driver is less likely to experience accidents and claims in the future. Drivers with safe records usually pay less.
  • Credit score. Some insurers use credit scores as a rating factor. However, this practice is banned in Ontario and Newfoundland & Labrador, and restricted in many other provinces.
  • Gender. Some insurers use the driver’s gender as a rating factor. As of 2020, women pay 5-15 per cent less for can insurance than men, on average. However, not every insurer uses gender to set rates; the public auto insurers in BC, Saskatchewan, and Manitoba don’t use gender as a rating factor, for example.

Your chosen coverages and deductibles

It may go without saying, but the coverage you choose has the greatest effect on your car insurance premiums. Just like home insurance, the more coverage you buy, the more your policy will cost. If you add optional coverages, like collision or comprehensive, your premiums will increase accordingly.

Your deductible selection also affects what you’ll pay. A high deductible will reduce your premiums, but you’ll have to pay a greater share of any claim settlements. Speaking of claims, these too have an impact on auto insurance premiums.

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Car insurance premiums and claims

There are basically two different ways that claims influence auto insurance premiums: the big picture, and the individual picture.

First, the big-picture view:

Insurance companies collect premiums from their customers. They use those premiums primarily to pay for claims. Naturally, when they have to pay more for claims, they need to collect more premiums. A major part of an insurance provider’s job is predicting future claims costs and adjusting their rates accordingly, so that there’s enough money on hand to pay claims as they occur down the road.

Costs can change for many reasons. More frequent accidents or natural losses (like hailstorms) obviously result in greater claims costs—but that’s just the beginning. Supply chain issues can drive up repair costs, as can labour shortages. As vehicles grow more advanced, so too does the cost of fixing them. All these things can result in insurers needing to change their rates.

Of course, these factors can also result in lower rates, depending on the situation year-to-year.

Car insurance rates are provincially regulated, so there are limits to how much an insurer can change them. For example, insurers in Ontario need to apply to the Financial Services Regulatory Authority to change their rates. They need to demonstrate that the change is necessary before the FSRA will approve it.

Now, let’s move on to the individual picture.

Increasing premiums after a claim

When you make a claim against your policy, your premiums will often increase afterward.

There are several reasons for this, but essentially, it’s because you’ve lost any claims-free or accident-free discounts you had. This is because, just like having no claims, having one or more recent claims is strongly predictive of having additional claims in the near future. Most of the time, your premiums will only increase following an accident for which you were at-fault (even partially).

Rate increases are at the discretion of the insurance company, so they won’t always happen. Many providers offer accident forgiveness coverage. If you buy this coverage, your insurer will ignore your first accident when it comes to calculating your premiums. (You’ll still have to pay costs associated with the accident itself, like your deductible.)

Even if it’s available, there are restrictions to accident forgiveness coverage. First, you’ll need to have several years’ accident-free driving to qualify. And, if you have an accident forgiven, that forgiveness won’t follow you to a new insurer if you switch.

Many provinces have a small level of accident forgiveness baked into their regulations.

For example, in Ontario, your insurer can’t increase your premiums due to an accident as long as the damage is under $2,000, there were no injuries, and no insurer made any payment for the incident. In British Columbia, ICBC will forgive one crash after 20 years of driving experience, as long as the driver has been accident-free for 10 years.

Most claims for which you’re not at fault won’t result in premium increases. Comprehensive claims shouldn’t increase your premiums, as the coverage deals with losses for which the claimant isn’t at fault. However, if you make many comprehensive claims in a short period of time, you may be unable to purchase it for a period of time unless the cause of repeated claims can be addressed.

When it comes to DCPD claims, they often won’t increase your premiums. In Alberta, for example, your premiums won’t increase following a DCPD claim.

Commonly asked questions

Why do car insurance premiums increase after a claim?

There are several reasons that your insurance provider might increase your premiums after you make a car insurance claim. The main reason is that making a claim removes any claims-free discounts you’d accrued beforehand. Insurers may also increase premiums if a customer makes many claims in a short period of time.

How do I lower my car insurance premiums?

The simplest way to reduce your car insurance premiums is to adjust your coverages. For example, by raising your deductibles, your premiums will drop—though you’ll have to pay more if you make a claim. Some providers offer discounts for insuring multiple vehicles, for bundling home and car insurance, or for many other things. Ask your provider if they have any discounts available that aren’t already applied to your policy.

In the longer term, practicing safe driving and avoiding accidents will allow you to accrue the maximum claims-free discount that your insurance provider offers.

Why are car insurance premiums so high?

Your personal car insurance premiums may seem high if you’ve recently been in an accident and lost your claims-free discount. Premiums may also be more depending on how you use your vehicle. For example, premiums are often higher for people who commute in a major city; more time spend around more traffic increases the chances of an accident.

Premiums are also impacted by the type of vehicle you drive. Vehicles that are prime theft targets or those that are expensive to repair may cost more to insure. The Insurance Bureau of Canada publishes rating data for most makes and models that can help you estimate how your vehicle measures up.

Want to learn more? Visit our Car insurance resource centre for dozens of helpful articles to guide you through the complexities of car insurance. Or, get an online quote in under 5 minutes and find out how affordable personalized car insurance can be.

About the expert: Daniel Mirkovic

A co-founder of Square One with 25 years of experience in the insurance industry, Daniel was previously vice president of the insurance and travel divisions at the British Columbia Automobile Association. Daniel has a bachelor of commerce and a Master of Business Administration (MBA) from the Sauder School of Business at the University of British Columbia. He holds a Canadian Accredited Insurance Broker (CAIB) designation and a general insurance license level 3 in BC, Alberta, Saskatchewan, Manitoba and Ontario.


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