How Car Insurance Rates are Calculated

Every time you have to renew your car insurance, you probably hear the little voice inside your head that wonders how much it’s going to cost you – because it seems to change every year. The truth is, dozens of factors contribute to the total cost of your car insurance premium, which is why trying to determine it on your own is simply not an option.

Your car insurance rates are determined by dozens of factors, all of which can be divided into four categories:

  1. Your Driving Profile
  2. Your Coverage
  3. Your Deductible
  4. Your Car Insurance Provider

1. Your Driving Profile

Your personal profile as a driver is one of the first things a car insurance company will ask you about, when you buy car insurance. Some of the things that may determine the cost of your car insurance premium include:

  • Your age: In general, anyone under the age of 25 is considered a higher risk, because they have less driving experience, and therefore have a higher probability of getting into an accident (based on years of car accident data collected by Statistics Canada). If you’re 25 or younger, you may pay slightly higher car insurance rates than those over 25. (Gender is also occasionally used to calculate car insurance rates, as young men are known to drive more recklessly and get in more accidents than young women.)
  • Your driving history: Your driving record is also used to calculate your car insurance rate. Specifically, car insurance companies will look at how long you’ve been a licensed driver, whether or not you took a safe driving course, how many accidents you’ve been involved in where you were even partially at-fault and then see if you have any driving convictions (speeding, impaired driving, etc.). If you’re ever deemed to be a high-risk driver, you may have a difficult time getting car insurance at all.
  • Your location: Car insurance rates tend to be higher for people who live in densely populated areas, such as major cities, because with more people comes greater chances that you’ll be involved in a collision, or have your car vandalized or stolen. If you prefer to live in the downtown core of your city, you can expect to pay even higher rates.
  • The type of car you drive: Insurance companies also use internal data to determine which vehicles are more risky to insure, based on statistics from every claim that’s been reported to them in the past. As such, they know which cars get into more accidents, which ones are more costly to repair, and even which ones are vandalized/stolen most often.
  • How much you drive: Your car insurance rate will also be affected by how much you drive your car, because the more time you spend on the road, the higher the chances are that you will get into an accident. Some car insurance companies will also ask the distance you drive to-and-from work, because greater distances can also result in higher premiums for the same reason.

2. Your Coverage

The amount of coverage you decide to purchase is the next thing that’s used to calculate your car insurance rate. All provinces and territories have individual rules around what type of coverage is mandatory (and the minimum amount you have to buy), at least for accident benefits and third-party liability insurance. For example, if you buy car insurance in Ontario, you need to have at least $200,000 of third-party liability insurance (and that’s the same in most provinces, except Quebec and Nova Scotia). Most people prefer to buy additional coverage (typically $1-5 million), however, which does cost more but would help protect you if you were ever involved in a serious accident.

On top of the mandatory policies, you can then choose to buy optional car insurance, such as collision coverage, comprehensive insurance and other policy endorsements. All of these optional coverages will have an effect on the cost of your premium.


3. Your Deductible

When you make a car insurance claim, you are responsible for paying a small portion of it yourself, called the deductible. You can save money on your insurance premiums by choosing a higher deductible, because you’re less likely to make a claim for minor damage, and your insurance company has to pay you less when you do make a claim. There are deductibles for collision coverage, comprehensive insurance, all perils and specified perils insurance.

For example, if you opt to get a $500 deductible for your comprehensive insurance, instead of $300, you will get a small discount on the comprehensive insurance portion of your rate. To that end, you can also opt for a lower deductible and pay more for your car insurance.


4. Your Car Insurance Provider

Finally, car insurance rates vary greatly from provider-to-provider. Why? For starters, some provinces operate under a public car insurance system while others are private (and Quebec is a hybrid of the two). British Columbia, Manitoba and Saskatchewan have public car insurance systems, which means all drivers need to purchase at least their basic car insurance coverage (third-party liability and accident benefits) through Crown Corporations operated by the provincial government; this gives drivers no room to negotiate or ask for better rates, though they are able to purchase the optional coverage’s (e.g. comprehensive) from other companies. All other provinces have private car insurance, which means drivers are able to use insurance brokers to help them get the best car insurance rate in their area.

Car insurance rates also vary from provider-to-provider because of the data about drivers/claims collected by each company that is pooled together. Every car insurance company has a number of “risk groups”, and companies charge premiums based on the claims experience of each group. When a car insurance company goes through your driving profile (outlined at the top), they will place you in a group. Whenever a driver in that group makes a claim, the premiums for everyone could go up. To that end, if claims go down for the group as a whole, premiums could also go down.


What Can’t Be Used to Calculate Car Insurance Rates

Car insurance companies may NOT legally consider the following, when deciding how much your car insurance premiums will be:

  • Your credit history (including past bankruptcies)
  • Your employment status
  • How long you’ve lived in your current home
  • Whether you own or lease your vehicle
  • Any period of time when you did not have car insurance
  • Accidents for which you were not at fault

It pays to shop around.

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