Understanding your car insurance premium

Last updated 16 May, 2024
Your car insurance premium is likely to change each year and you may wonder why. We want to help you understand your premium. This guide gives you the facts: how your premium works, how it’s calculated, and why it can change.
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How your premium works

The money you pay insurers to insure your vehicle is called a premium. By paying your premium, you’re contributing towards a shared pool of funds that helps to pay claims. It’s also used to pay for expenses - such as staff, office space and other things that keep the insurer’s business going.

Insurers consider each policyholder’s circumstances to determine their likelihood of making a claim. That’s how they make sure each policyholder’s premium makes a fair contribution to the shared pool of funds.

Calculating your Motor Insurance premium

Insurers base your premium on your circumstances, the cover you’ve chosen, your likelihood of making a claim, and the potential cost of the claim. That’s why each person’s car insurance policy is different, and no two premiums are alike.

To work out how much it will cost to provide insurance for your vehicle, Allianz uses various data sources. We’ll also ask you specific questions. Your answers are important, and all customers have a duty to not make a misrepresentation when answering our questions. 

To calculate your premium, insurers use a number of risk factors to determine your likelihood of making a claim. Some of the key factors Allianz uses include:

Use of the vehicle

Whether a vehicle is used for personal or commercial purposes helps insurers figure out the level of risk involved with it being involved in an accident. Insurers consider the frequency and distance of travel, as well as the purpose of the vehicle.

Type of cover needed

The cover type means the level of cover provided by the insurance policy. Third-party insurance only covers damage you cause to other people’s car or property. Comprehensive insurance covers both damage to other people’s cars and property, as well as damage to your own car. The greater the level of cover, the higher the premium will be.

Excess

Excess refers to the amount of money you agree to pay out of your own pocket towards any claims. For comprehensive cover, if you choose a higher excess, your premium will typically be lower because you will need to pay more towards the cost of any claims. If you choose a lower excess, your premium will be higher because the insurer would be taking on that risk.

Age of the drivers or how many years they’ve held a licence

Allianz claims experience shows that inexperienced drivers are more likely to have a claim. This could be from overconfidence, a lack of skills or awareness, or distracted driving.

Claims history of all drivers

Past driving behaviour tends to predict future driving patterns. Allianz claims experience shows that drivers who have had an at fault claim are more likely to have another claim at some stage. 

Make and model

For comprehensive cover, the availability of parts and cost of repairs differs between makes and models. Other factors such as the cost of the car, safety features, performance, theft rate, and crash test ratings all play a role in determining the premium. For information specific to electric vehicles, visit the Allianz EV Hub.

Value of the car

For comprehensive cover, insurers look at the amount your car is insured for when deciding on the premium. This is an important factor and generally, the lower the amount, the lower the premium will be. Other factors, like claims cost, can also impact the premium. 

Financing

Allianz internal data suggests that customers whose vehicles are financed are more likely to have claims. This affects the premium for comprehensive cover.

Usual overnight parking location

This refers to the area where your car is usually kept overnight and if it’s in a higher or lower risk area for accidental loss or damage to the vehicle. This includes areas prone to collisions, theft, or vandalism.

Compulsory government charges

Compulsory charges imposed by the Australian and State governments, such as Stamp Duty and GST, can affect the cost of your car insurance. These are added to the base premium and are often influenced by how much the vehicle is insured for.
For more information, view the Motor Insurance PED Guide (PDF, 70 KB).

How claims affect your premium

Did you know that a significant portion of your overall premium goes towards paying claims? If the overall cost and number of claims paid increases, this can force premiums higher.

Here are some of the key factors that can influence claims costs:

New vehicle technology

New safety features in cars, such as crash avoidance sensors and advanced braking systems, can help prevent accidents or make them less severe. This technology may lead to fewer claims, but can also increase the cost of those claims.

Number of vehicles on the road

The more cars there are on the road, the higher the chances of accidents and collisions. More collisions can increase the number of claims insurers get. The more money insurers have to pay out increases the overall cost of premiums.

Average value of cars

Higher average car prices tend to result in higher claim amounts. This is because the cost of replacing more expensive vehicles is generally greater. This higher cost can lead to an increase in premiums to account for the overall increase in potential claim amounts.

Claims inflation

This refers to the increase in the cost of claims over time. This can happen when vehicle repair costs increase due to more advanced technology , expensive materials, or disruptions in supply chains. It can also be influenced by factors such as changes in laws and regulations.

Labour shortages

A lack of skilled labour, such as mechanics and repair technicians, can lead to longer waiting times for processing and repairing vehicles. This can cause frustration and dissatisfaction for policyholders. The need for additional resources to handle these issues can lead to higher premium prices to cover the increased costs.

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Disclaimer

This article has been prepared by Allianz Australia Insurance Limited ABN 15 000 122 850 AFSL 234708 ("Allianz"). In some cases, information has been provided to us by third parties and while that information is believed to be accurate and reliable, its accuracy is not guaranteed in any way.