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Insurance Premiums Explained

How insurance companies calculate your vehicle premium

By Michael Knowling

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Are insurance companies the enemy? Well, you might think so if you’ve received quotes to insure a modified high-performance vehicle.

In some cases, you won’t be able to find a company that’ll insure you and, if you do, you’ll likely be paying a bomb. We’ll never forget the time we rang an insurance company for a quote, only discover the annual premium was more than the cost of the car!

So, first, is comprehensive car insurance a must-have?

Comprehensive car insurance is viewed by many vehicle owners as an essential cost – their logic being along the lines of ‘if you can’t afford to lose the car, you need to have it insured’. On the other hand, some people take the line of ‘if you’re paying AUD$800 a year to insure a car worth AUD$4000, you’re effectively betting that you’ll need to make a claim within around four years’. (This ignores the advantages of third party property protection, which can usually be be purchased separately.)

Each of these is a valid viewpoint but the strength of the latter argument depends heavily on the relationship between the cost of the car and the insurance premium.

So what determines your premium?

According to SGIO’s Product Manager, Brad Warren, the most common factors are your age, driving history, the type of car, where it’s kept, its intended use, whether the car is under finance and if there is any non-standard equipment/modifications.

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The most important factors are age and driving history.

“Although I don’t really like to say it, it’s true that young males are a high risk from an insurer’s point of view,” says Mr Warren.

According to SGIO’s claims data, males contribute 60 percent of all at-fault claims in the 16 to 19 year old bracket. From 20 years of age and beyond, there’s very little difference in gender bias.

As many will be aware, some insurance companies will not cover drivers less than 25 years old - regardless of gender. Again, this type of policy is based on the company’s claims data and is aimed at minimising their financial risk. Many insurers also have policies regarding recent traffic infringements, license disqualification and the number of previous at-fault claims.

If you’ve been involved in any of these, your premium will increase or you might not be able to obtain coverage.

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Typically, a no-claim bonus strategy is used by insurance companies to reward drivers who manage to avoid making a claim. A new driver will usually commence insurance with a no-claim bonus rating of six - this means you’re a high risk so you’ll be paying quite a lot for insurance. In most instances, your rating will improve each claim-free year until you reach a rating one status. Rating one usually reduces the cost of the annual premium by around 60 percent.

Dominic Kruysmulder, Suncorp Motor Channel Officer, says Suncorp offers rating one protection for life if you’ve been a rating one driver for more than two years and had no at-fault claims in that time – so, even if you’re at fault in an accident, you don’t lose your top-level rating.

On the other hand, Mr Kruysmulder says it is possible to go lower than a rating six if you’re a new driver at fault in a series of claims. Be warned – you can go backwards!

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The vehicle make/model is another critical factor in determining your insurance premium. A vehicle that is commonly involved in claims – regardless whether it’s caused by collisions, theft or vandalism - will demand a relatively high premium. Insurance companies typically record the occurrence of a particular make/model vehicle involved in claims and the premium is adjusted accordingly.

The premium that’s set for a particular vehicle automatically takes into account any factory security features. Mr Warren says there may be a premium reduction if the vehicle is fitted with an aftermarket security device such as an alarm or GPS tracking system. This is assessed on a case-by-case basis. However, it’s worth noting that, according to SGIO statistics, nearly 75 percent of all claims are caused by collision – theft represents only around four percent of claims.

Next, it’s up to you to decide whether you want a policy that covers the vehicle for an agreed value or market value. In most instances, market value is calculated annually and draws from industry publications - SGIO and AAMI use Glass’s Guide as part of their market valuation. An agreed value policy gives you the flexibility to pay either more or less than the average value for a particular vehicle – you can save money on the premium if you think the market value is excessive or you can pay extra to cover a vehicle that’s in perfect condition, has very low kilometers or has extra accessories.

“Wherever there are aftermarket accessories, like an AUD$2000 stereo system, we’ll make a note on the insurance policy, increase the insured value of the vehicle and adjust the premium,” says Mr Warren. It’s not insured as a separate item.

And that brings us to the topic of bolt-on performance mods.

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Of those companies we contacted – SGIO, AAMI and GIO – all were prepared to consider modified vehicles on a case-by-case basis. Geoff Hughes, AAMI Corporate Affairs, says there are many cars that are comprehensively insured with aftermarket wheels and lowered suspension but there are no definitive regulations – what is certain is that, depending on your other insurance details, you’re less likely to obtain coverage. Mr Warren says SGIO follows a similar strategy.

“There is no across-the-board rule to modification although the vehicle must be roadworthy,” he says.

“If the car is involved in an accident, you have not advised us of modifications and it can be proven that those modifications were a contributing factor, we may be in a position to withdraw coverage.”

This is a rare occurrence but it’s important to keep in mind if you’re bolting on a supercharger or altering the suspension.

For similar reasons, it’s important to let your insurance company know of any relevant changes to your driving history – a process that, according to Mr Warren, many people forget. Take the time to read your insurance contract and you’ll see you must discolse any changes to your driving record. If you have been convicted of a driving offence, you’re insurance premium may increase or, in extreme situations, coverage may be declined. Either way, it’s important to get this sorted out before you need to make a claim.

The locale where the vehicle is kept (often determined by the post code) is another factor that’s taken into account when calculating the premium. The cost associated with a specific area is based on the company’s claim data and, in some instances, police stats may be checked.

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Other factors, though having a relatively minor effect on premiums, include \whether the vehicle is leased, used for business purposes and whether you’ve been recently bankrupt – if you answer yes to any of these, you will pay more for your premium.

So, clearly, insurance companies use some strict rules and risk management strategies to determine your annual premium. But these rules and strategies are fairly calculated and there is some flexibility to accommodate modifications.

On-line Premium Calculators

Many insurance companies offer an on-line calculator foryour vehicle insurance premium. The AAMI service (found at is typical of most systems and requires information on the make/model of car, your age/driving history, finance, modifications/accessories and location.

We used the on-line calculator to compare premiums and found some interesting results...

Not surprisingly, a 24 year old male driver cannot obtain insurance on a Holden VX Commodore with a Gen 3 V8 – regardless of any other insurance details. However, a 25 year old male owner can obtain insurance from AUD$620 annually so long as he has a spotless driving record.

Amazingly, a V6 version of the VX Commodore costs the same to insure as the Gen 3 – a 25 year old male is looking at AUD$620 for an auto Executive. Why is the V6 on-par with the V8, you ask? We can only guess that AAMI’s claim data shows that a young driver is an equal risk whether at the wheel of V6 Commodore or V8. Further comparisons show that changing the garaged area to a higher risk zone increases the premium by around AUD$30 and a recent claim for theft adds around AUD$20. A 25 year old male owner isn’t allowed to add an exhaust, extractors, chip and mag wheels to his V6 Commodore but just an exhaust and mags are acceptable.

Verdict? We strongly suggest investing some time grabbing some on-line insurance quotes before going ballistic with vehicle modifications – you’re better off finding out that you can’t obtain insurance before you go ahead...


SGIO 13 32 33

GIO 13 10 10

AAMI 13 22 44

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