Why Is Car Insurance So Expensive? (And How To Save Money On Car Insurance)

For car owners, car insurance is a necessary evil. No one likes paying for a service you only sometimes use, but it’s still essential to be covered.

But once you’ve accepted the inevitable hit to your wallet, the price of car insurance is something of a black box, and hard to understand.

So why is car insurance so expensive? And why does the price of car insurance vary so much?

The short answer: Insurance is weird.

The medium answer: Insurers take a risk that your premiums will cover your payouts over time, so they charge more for higher risk drivers. There are hundreds of factors that can increase that risk.

The long answer: You asked for it! First, let’s get a primer on how car insurance works in Australia…

You (the driver) pay a car insurance company a regular premium. In return, they cover certain costs in the case of damage. In an accident, the atfault driver’s insurance will cover the costs. However, this depends on the type of cover, as not every product is the same:

  • Compulsory Third Party is a legal requirement, and covers the cost of personal damage you cause to others, eg medical bills. Some states bundle it with registration (eg. South Australia) and others make you buy separate cover from an insurer (eg. NSW).

  • Third Party Property covers the cost of damage to other people’s property. This is essential for a safe driver – if you hit a Lambo without cover, you could be up for tens of thousands in repairs! Third party property won’t cover damage to your car.

  • Third Party Fire and Theft is the same as third party property, but also covers your car in the case of fire or theft.

  • Comprehensive Insurance is the most comprehensive insurance you can get. It covers the damage costs of people’s property when you’re at fault, as well as your own car. It’s generally much more expensive than third party-only products.

Car insurance can be expensive when you need it to cover the cost of car theft

Car insurers are taking a risk on you paying a high enough premium to cover your claims over the long term, and when averaged across other customers. As such, they charge higher premiums for drivers more likely to make a claim, from either accidents or damage. They determine how much of a risk you are by scoring you on many different Risk Factors. It’s these risk factors that are the cause of high car insurance premiums. There are thousands of factors, but below are a few of the most prominent ones:

  • Age. Younger drivers are involved in more accidents, so premiums are higher.

  • Driving Experience. At any age, novice drivers are over-represented in crash statistics.

  • Driving History. If you often get busted for speeding or have your license suspended, you’ll be classed as higher risk.

  • Gender. Men typically pay more for insurance, especially when they’re young. (up to 17% more).

  • Type of Car. If you drive a model that gets into accidents more often, your premiums will be higher (even colour can be a factor).

  • Location. Cities typically attract higher premiums than the country. Extra traffic increases the risk of an accident, while higher crime increases the chance of car theft.

  • Claim History. If you’ve been involved in accidents that resulted in a claim, your risk profile could increase. This is a very fuzzy area, and while some past claims won’t affect your premiums at all, accidents where you weren’t at fault can cause them to increase.

  • Cover History. An uninterrupted insurance history tells insurers more about you, and normally means slightly lower premiums than if you have gaps.

  • Where your car is parked. For fire and theft or comprehensive cover, how safe your car is when parked will affect your risk. The more secure your car, the lower your premiums.

  • Which state you’re in. Australian car insurance is primarily regulated at the state level, and there can be big differences between premiums across state lines.

Young drivers will pay more for insurance (which is why GoGet is perfect for young drivers)

In the future, the factors influencing your premiums will be even more complex. With the Big Data and machine learning capabilities insurers now have access to, smaller correlations between circumstances and risk can be determined, and used to change your risk profile.

For example, an insurer’s algorithm may indicate that drivers on your street make 30% more claims than the average driver in your suburb, perhaps from a poorly signposted intersection. The insurer won’t know about the intersection, but the correlation will affect your premium.

You might be reading thinking ‘this isn’t fair!’ – in a way, you’re right. Car insurers literally discriminate in order to balance their risk, in ways that may otherwise be illegal (age discrimination for example, has an insurance exemption).

Unfortunately, as long as you own a car, you’ll have to live with this state of affairs. That being said, there are some ways you can save on car insurance…

Trading your car for a GoGet membership is a great way to save money on car insurance

So how can you get the best deal on insurance? There are plenty of options if you’re ready to pay less, though some will make a bigger difference than others. Let’s start with the biggest opportunity to save money…

Sell your car. You can save 100% on car insurance if you don’t own a car – you could also save some of the other ~$7,000 your car costs each year. Some of those savings will go to other forms of transport, of course. If you have a second car, you’ll use it more, and you’ll spend more on buses, trains, taxis, and car share services like GoGet.

Generally speaking, replacing your private car with a combination of GoGet and public transport will save you money if you drive less than 10,000km a year. Don’t take our word for it – this research from Finder backs it up!

Shop around. The next best way to save money on car insurance is to compare different insurers, and find the cheapest option. The insurance industry is notorious for charging different prices for the same product. Don’t be afraid to change providers, but make sure you factor in long-term ‘loyalty discounts’ – they’re sometimes worth it.

Comparing car insurance is not a simple process, but there are companies that make is easier. Finder.com.au is one of Australia’s biggest comparison sites, but a quick Google search will pull up others. These sites compare hundreds of car insurance products in seconds, with ratings and reviews for each company. The sites are paid on commission, so you aren’t paying any more by using them.

Drive less. If you can’t sell your car yet, you could save money by driving less. Some insurers offer pay-as-you-drive cover. These charge per kilometre, and can be much cheaper if you only drive occasionally. Of course, you’re still paying full price for registration and maintenance, as well as the actual cost of the car. That’s why we recommend selling if you can.

Drive safer. A history of safe driving will lower your premiums, as car insurance companies will see you as less of a risk. By driving safer, you’ll naturally cause less problems on the road, and save money over time. You’ll also be saving the time, money, and stress that comes with every accident. It could also save your life!

Keep your car safe. You can reduce your premiums by reducing the risk of your car getting damaged or stolen. If you have comprehensive insurance, insurers will charge less if your car is kept in a locked garage. This will also prevent hail and environmental damage, claiming on which could increase your premium.

In general, car insurance is something you’ll just have to deal with. Attempts at saving on car insurance have diminishing returns, unless you’re able to sell your car and opt out of the system completely.

Your best bet is to take a Big Wins approach. This means following any of the above steps you can easily take, but not worrying too much. Instead, focus on other areas of your life where you can save more. You can learn more about it here.

Tim Beau Bennett

Tim is an ex-journalist and radio presenter, and has been a professional writer for over a decade. He regularly writes about technology, lifestyle, and smart cities, and has written for news site including the ABC, SBS, and Australian Financial Review.


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