Insurance premiums explained (in plain English)

We get a lot of questions about insurance premiums and how they work. Unfortunately, the insurance industry is overflowing with jargon, complex policies, and conditional answers—to the point where it’s just hard to navigate.

We’re on a bit of a mission to turn that around. That’s why we wanted to explain how insurance premiums work in clear, unambiguous language. If you’re looking for clarification on premiums then you’re in the right spot!

How are insurance premiums calculated?

Ah, the age old question: how do insurance companies come up with their prices? Depending on what type of insurance you’re trying to secure, insurance providers look at a wide range of criteria. These aren’t exhaustive lists, but they hit on the major factors that you should know about.

Auto insurance premiums

  • Driving history: This includes years licensed, license suspensions, accidents, convictions, speeding tickets, and other minor infractions (P.S. This is how insurance companies check driving records).
  • Insurance history: Insurance companies can access data that includes things like your past insurance providers or policy cancellations on record.
  • Age: Younger, less experienced drivers can be more expensive to insure (statistically).

 

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  • Location: Where you live can affect your rates. Urban areas tend to see slightly higher auto rates due to the population density—more people means more cars and more pedestrians on the road, after all.
  • Vehicle: Your vehicle carries its own set of risks. Some can withstand more damage than others, but the cost to repair or replace a vehicle is also a significant factor. Driving an economically priced vehicle costs less to insure than a luxury vehicle, all else being equal.
  • Number of drivers: More people operating your vehicle tends to raise the likelihood of an accident occurring, especially if one driver has at-fault accidents on record. You can read more about second driver insurance rules here.
  • Kilometres driven per year The more you drive, the more you increase your risk of getting into an accident. Working from home for even 1-2 days per week can reduce your annual distance by 10%-20%.
  • Work status: Retirees can usually change their policy status to “driving for leisure” because they don’t need to drive to work every day. Fewer road trips and fewer kilometres driven has a significant impact on your premium.

This list isn’t exhaustive, but these are the most important factors in determining your auto insurance premiums.

 

 

Home insurance premiums

  • Size: Your home’s size matters because home policies are priced, in part, according to the cost to repair or rebuild the structure. Larger homes would take more materials and more labour to fix in the event of a claim.
  • Age: As homes get older they develop higher risks of things going wrong, such as pipes bursting or the foundation cracking. Very old homes may even have features that prevent companies from insuring them, if they haven’t been updated.
  • Structure type: Different structures often have different rates. For example, some stand alone while some are conjoined with neighbouring homes. That’s why rates could vary depending on the structure type. A split-level townhouse would have a different rate from a two-storey or three-storey detached house.

 

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  • Credit score: Your credit score isn’t a factor used to calculate auto insurance in several provinces, but it’s certainly a factor for home insurance. That’s because your ability to pay down debt consistently is one of the best indicators of a low-risk policy holder. You don’t have to provide it if you don’t want to, but it helps your rates if your credit is in good standing.
  • Location: Is your home located in a large city with a higher-than-average crime rate, or far enough outside of one that fire halls need time to get there? Is it located in an area where natural disasters occur, such as tornadoes, hurricanes, and floods? All of that has an impact on your rate.
  • Property: Do you have a large property that requires maintenance, such as a wooded area where falling branches could cause damage to your home?
  • Security: Do you have a security system in place? Things like cameras, a safe, or any type of additional safety measure can contribute toward savings on your home policy.
  • Business: Do you use any spaces in your home for work, such as a permanent home office or a workshop on the property? Many home policies can accommodate a small side hustle run from your home office, but a full-fledged business could require a separate policy (especially if it’s outside of the services sector).

This list isn’t exhaustive either, but touches on the most relevant factors. Remember that some buildings are unique as well, and deserve a custom evaluation—such as seasonal cottages deep into the Muskokas, for example.

How can I reduce my insurance premiums?

When it comes to high insurance premiums, people tend to think about their driving records as the biggest culprit. That’s accurate for auto insurance; license suspensions, parking tickets, and convictions are all on your record for up to six years and definitely taken into account.

Since you can’t go back in time and correct a less-than-stellar driving record, there are other things you can do to reduce your insurance premiums.

  1. Buy or lease a car with a low-cost insurance rating. Some vehicles cost less to insure than others—unsurprisingly. You can use a system known as CLEAR (Canadian Loss Experience Automobile Rating) to review insurance and safety ratings, among other things.
  2. Buy or lease a car that has a high safety rating. The higher the safety rating, the better the safety features are in your vehicle. Anything you can do to reduce your risk of an accident is going to help lower your premium.

 

"Car insurance that hurts way, way less" beside toy cacti.

 

  1. Combine your home and auto policies for savings. We always encourage people to bundle their insurance because most providers will offer a discounted rate in exchange for the extra business. If you have home insurance with one company and auto with another, chances are high that you’re paying more than should be.
  2. Take advantage of group rates and alumni discounts. Universities, colleges, and professional associations sometimes offer special deals or discounted rates to their students and members. For example, members of Professional Engineers Ontario receive discounted insurance.
  3. Install security devices (even in your car). Adding a security system to your home or a driving assist camera to your vehicle, it reduces the chances you’ll need to make a claim for theft or robbery. If you’ve recently added a new security device, be sure to update your insurance provider.
  4. Reduce your annual commute. Working from home and carpooling can help to chip away at your auto rates. Take public transportation, bike, walk, or carpool when you can to reduce the number of kilometers that you drive each year—and make sure your insurer knows about it!
  5. Exclude high-risk drivers from your policy. A new driver or someone with a history of driving convictions (or even speeding tickets) is going to increase your premiums if they’re listed on your policy. It may be better for your wallet if they secure insurance independently with a policy specifically for high-risk drivers.
  6. Increase your deductible. This is an obvious one. The more you have to pay when you make a claim, the lower your premiums become. How low is too low, though? The Canadian Loss Experience Automobile Rating system we mentioned earlier can also be used to estimate the likelihood of a claim and its cost, so you can adjust your deductible accordingly.
  7. Drop optional coverage on an older vehicle. Is there an old clunker you barely use in the winter that would head to the scrap yard if it got in a fender-bender? Consider removing collision coverage and other optional coverage you may have on older vehicles.
  8. Look into telematics devices for your car. Certain devices (or even phone apps) can use gyroscopic hardware to measure your speed, how hard you brake, and the stability of your vehicle’s turns. Driving safely can net discounts from certain insurance carriers as you build up an empirical, measurable track record for safety.
  9. Keep up with proper maintenance. Are your brakes on the rusty side? Do you have winter tires (and do you use them)? Do you keep up with regular oil changes? Even modest maintenance helps your vehicle stay in good shape if it’s consistent.

 

Location counts, as we’ve seen. According to the Insurance Bureau of Canada, cities or neighbourhoods with higher population densities or crime rates can experience higher insurance rates—even as much as a 25% difference, in some areas. Unfortunately, relocating to save on insurance isn’t really a practical option for most people, but it’s worth considering if you’re thinking about moving in the near future.

Want more answers about how insurance works? We have a team of certified brokers ready to chat!

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Boil half an egg?

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