Car insurance premium calculation

How do insurance companies calculate premium? Time and again the premium may be attuned for some bonus or concession that the company offers its customers. However, these are considered once the company determines a fixed premium that they would charge you.

Several factors are considered prior to premium calculation. Listed below are the most important factors that influence premium for your car insurance:

Cubic Capacity (CC) of the Car

Each car has a specific engine size. This is measured as its ‘cubic capacity’. The engine size influences premium of car insurance; precisely the third party insurance cover. The premium amount decided is the same for a brand new car and an old car, for the reason that the premium is a function of the engine size. The age of the car does not have a role to play in this. When it comes to calculating premium for a comprehensive cover, engine capacity is not considered as a criterion by insurance companies.

The simple formula followed by insurance companies is the engine size versus premium amount. The higher the cc, higher will be your car insurance premium. The cc for your car is documented on registration papers of your vehicle.

Listed below are details for rates on the third party cover premium amount according to the engine size (as of June 2010):

Cubic Capacity of Car	Car Insurance Premium in INR
Less than 1000cc	500
1000 – 1500 CC	600 600
More than 1500 CC	700 700

Insured Declared Value

It is important to note that at a specific given point, your car has a specific value associated with it. In the event of total loss owing to an accident, the car insurance company gives out compensation if your car is insured. Now how much is this compensation?

The amount of compensation allotted to you under a comprehensive motor insurance cover is straight associated to the value of vehicle at that point in time.

For instance, if you own a new car driven out of a showroom, it has more value as compared to a car that is three-year-old car and has 30,000 km recorded on it. The ‘insured declared value’ (IDV) is precisely the value an insurance company places on car in order to calculate approximately its worth right at the time you apply for car insurance policy.

Motor insurance policies are precisely protection (indemnity) policies. Technically, they compensate you for an amount equivalent to financial loss that you suffer on the insured car.

IDV is calculated as the maximum amount that an insured individual can claim under a car insurance plan in order to compensate for loss arising from theft or accident. Hence, if you suffer total loss in the event of an accident for your two and a half year old car worth 5 lakh INR at the time of the accident, you will be compensated ONLY for 5 lakh INR and nothing more.

In case, you buy a new car and insure it, the IDV must be calculated on the basis of price of the new car which is exactly the ex-showroom price. In case, you have a car that you wish to renew the insurance for, the IDV will be attuned for any operational wear and tear the car has experienced. To be technically precise, the insurance company will adjust IDV for any depreciation undergone for a vehicle of equivalent age.

What about accessories installed?

In case, you have accessories installed in the car such as a special music system, ant-theft device, or speakers in your car, the insurance company will add the price to IDV. It is regarded as additional to the car price. It is also adjusted for any depreciation the accessories may have undergone.

So if you are buying an insurance policy for your car that is approximately 5 years old or more, then the insurance company will determine IDV on the basis of an understanding between you as well as the insurer soon after adjusting for the schedule of depreciation.

Here, you must keep in mind that the calculation of IDV calculation is used only for comprehensive car insurance policy. IDV is not considered for third party insurance cover (the mandatory cover).

Listed below is rate of depreciation against the age of vehicle used by car insurance companies in India to calculate IDV:

Age of Vehicle	Rate of Depreciation in %
Less than 6 months	NIL
6 months to 1 year	5%
1 – 2 years	10%
2 – 3 years	15%
3 – 4 years	25%
4 – 5 years	35%
5 – 10 years	40%
More than 10 years	50%

The above mentioned figures in tables for IDV and CC are the basic minimum amounts as predetermined by the Indian Motor Tariff Act. You may require paying an additional amount that over and above this minimum for third party cover (CC) and comprehensive cover (IDV). These minimum amounts will remain the same, regardless of the brand or the age of the car.