Why vehicle insurance premiums differ from one person to the next

Two South Africans can drive the same car, park in the same suburb and still pay very different monthly insurance premiums.

It feels unfair, especially when your friend, neighbour or colleague casually mentions they are paying a few hundred rand less for cover on the same make and model. But insurers are not only pricing the vehicle. They are pricing the driver, the risk and the likelihood that something expensive will go wrong.

As Ernest North, cofounder of Naked Insurance, puts it: “People often assume car insurance is priced mainly on the car. But in reality, insurers are trying to estimate two things: how likely you are to claim, and how expensive that claim is likely to be. That is why your insurance quote and your neighbour’s can differ even if you drive the exact same car.”

In other words, your premium is not just about the metal on four wheels. It is also about you, where you drive, where you park, your claims history and the choices you make when structuring your policy.

Your car is only part of the story

Insurers look at a basket of factors when deciding what to charge you. It can include your age, how long you have had a licence, your claims history, how long you have been insured, where the car is kept overnight and how the vehicle is used.

A driver who has had a licence for more than 10 years, drives modest distances, has not claimed recently and parks behind secure gates is likely to be viewed differently to someone who has only been driving for a few years, has had a recent accident and parks in the street.

“Insurers don’t price a Toyota Corolla in isolation,” North says. “They price a Toyota Corolla driven by you in your context.”

For example, a car used mainly for short personal trips may carry a different risk to one used daily in heavy traffic or for business purposes. A car parked in a locked garage may attract a different premium to one parked in the street overnight.

Insurers may also use your credit record as a risk signal – scrutinising available data to help predict risk and price accordingly. Different insurers weigh these factors differently, which is one reason quotes can vary widely.

The excess trap

One of the easiest ways to reduce your monthly premium is to choose a higher excess. The excess is the amount you agree to pay when you claim. If your excess is R7,500 and your claim is accepted, you pay the first R7,500 and the insurer pays the balance, subject to the policy terms.

A higher excess generally means a lower monthly premium. A lower excess generally means a higher premium. That is the insurance seesaw: pay less every month, but more when something goes wrong.

“The key is to choose an excess you can realistically afford,” North says. “A lower premium can look attractive, but not if it leaves you stuck when you actually need to claim.”

This is where many people get caught. A cheaper premium can look like an advantage until you discover that the excess is far higher than you expected.

Even worse, some policies include an additional excess in certain situations. For example, you may pay an extra excess if the driver is under 25, if the accident happens at night or if you claim within the first few months of taking out the policy.

North says drivers should read the policy terms carefully so that they know exactly what they would actually need to pay at the claim stage.

Don’t compare premiums in isolation

It is tempting to compare car insurance by looking only at the monthly debit order. But two policies with similar premiums can offer very different cover.

Before switching insurers, check whether you are comparing the same type of cover. Comprehensive cover, third-party, fire and theft and third-party-only cover are not the same thing.

Also compare the excess, exclusions and extras:

Does the policy include car hire?

• What happens if the car is written off and you still owe the bank more than the vehicle is worth?
• Is credit shortfall cover included or charged separately?
• Are there limits on who may drive the car?
• Is there an additional excess for young drivers?

“People often compare prices without comparing what’s included,” North says. “The right question isn’t only what does it cost? It’s what am I covered for, and what would I pay if something went wrong?” DM

This story first appeared in our weekly DM168 newspaper, available countrywide for R35.