Car Insurance 101: How Premiums Are Calculated, Understanding Your Policy and 8 Top Insurance Myths

car insurance basics how premiums are calculated understand policy

by Benjamin Yong

Auto insurance is one of those things many drivers don’t normally think twice about. Most of us visit the driver’s centre once a year, and some don’t even do that with the advent of online quotes for car insurance offered now by most major companies. Considering its importance, here is a basic introduction and some interesting facts regarding coverage.

According to stats site Statista, in the United States as of 2015, there were over 263 million registered vehicles. And in Canada, auto insurance alone accounts for more than 40% of the country’s insurance industry market share; generating the highest value of net premiums.

With this much insane dollar volume, you have to ask: how does this all work and where does the money go anyway?

With this much insane dollar volume, you have to ask: how does this all work and where does the money go anyway?

That money is pooled together and is used to cover the claims of people falling victim to things like vandalism or who are involved in collisions. Because it is an annual contract, your premium fluctuates a bit every year depending on the insurance companies’ evaluation of how much money they need to cover the upcoming year’s claims.

How are premiums calculated?

There are some differences that vary depending on the province and provider, but your premium is basically calculated by how likely you are to make a claim. Factors include the demographic you belong in, what type of vehicle you drive and your past claims history. As consumers, the way we find out how much we need to pay is changing as well, again thanks to the Internet. The ability to get online quotes for car insurance has made shopping around for coverage as easy as turning on a computer.

Understanding your policy

There is no one-size-fits-all for coverage, and insurance only pays for types of losses specified in your contract so it is important to read and understand your policy. As convenient as getting online quotes for car insurance can be, make sure to call and talk to a representative if you have any questions about what is and isn’t covered.

Some interesting car insurance facts & figures

Based on a seven-year national average from 2004 to 2010, 53.1¢ went towards fulfilling claims, 15.9¢ to the government through taxes, 20.5¢ to industry operating and regulatory costs and 10.5¢ to industry profit (in Canada).

Contrary to popular belief, red cars don’t cost more to insure. Premiums can take into account the model (including whether it is a two door or four door) and year of the vehicle, but not the colour.

Parking tickets will not affect your insurance rates, as it is a violation committed while you’re not actually operating your vehicle. However, excessive speeding tickets can, since it can indicate a pattern of risky driving behaviour.

On average, men can pay anywhere from $500 to $2,500 more than women for auto insurance. Both sexes under the age of 25 pay much more than more mature drivers.

Now that you know a bit more about car insurance at its basic level, it’s time to do some shopping. Companies can be highly competitive when it comes to rates, so doing a little research now can mean big savings later when it comes time to actually pick a provider.

8 Car Insurance Myths and Facts Every Motorist Should Know

Insurance Myths and Facts. We dispel some of the most common automotive insurance myths.

You can opt to drive a hybrid or a gasoline powered car.

You can choose the year, colour, make and model.

But the choice ends when it comes to the actual driving.  You need registration, an operator’s permit and an insurance policy. Of those three requirements, insurance is often the most misunderstood, and the industry is wrought with myths.

Just ask Anne Marie Thomas at Canada’s InsuranceHotline.com.

“We have consumers emailing us questions all of the time,” Thomas said. “And, if you work at any level in the insurance industry, the minute people find out you’re in insurance they ask if such and such is true or not.”

Just like the doctor has to deal with impromptu diagnosis of symptoms at a dinner party, the insurance broker has to answer questions about car coverage and liability.

InsuranceHotline.com has been around since 1994, and that makes it the oldest comparative quoting service in Canada. It is an independent (they are not owned in part or in whole by any insurance company or broker) online automotive policy rate comparison search engine.

The service is free. A policy shopper enters some basic information and InsuranceHotline.com finds the lowest three rates. According to Thomas, her company is able to search some 30 insurance providers.


Here, Thomas dispels some of the most common automotive insurance myths.

Myth One: Red cars cost more to insure than any other colour.

A: The colour of your car plays no part in the calculation of your insurance premium. In fact, that question is not even asked on the auto insurance application.

Myth Two: All car insurance policies cost about the same.

A: Not true. Rates can vary by hundreds of dollars across insurance companies for virtually the same policy, and they are always changing, so it pays to shop around.

And, here’s a myth related to Myth Two: Your broker or agent can shop your business and find you the lowest rate available.

A: That’s not always true, because they can only shop around among the limited number of companies they represent, typically no more than four or five.

Myth Three: If I switch my car insurance company, I will lose my loyalty discount.

A: That’s possibly true, but depending upon the rate of the new company and the discounts that they may offer (not all discounts are the same, age, winter tires, etc), it may be worth your while to change regardless of this ‘loyalty discount’.

Myth Four: I pay more than my friend so I must have more coverage.

A: Not necessarily true. The basic policy and minimum coverages are the same regardless of who you are insured with. Rates for optional coverages like collision or comprehensive can vary widely across companies, so paying more does not necessarily mean you are getting more.

Myth Five: The police did not charge me with the accident so I’m not at fault.

A: Not always true. You could be found by your insurance company to be at fault in an accident and not be charged by the police.

Myth Six: I don’t have a good driving record. I should just stay where I am with the same insurance company.

A: No. It still pays to shop around. Not all insurance company rates are the same and they can vary by hundreds of dollars for a given car and driver, regardless of whether they have a clean driving record or several tickets and accidents. The trick is finding which company has the lowest rates for you and your profile.

Myth Seven: If my friend drives my car and causes an accident, it won’t show up on my insurance record.

A: Wrong. Your insurance history (claims, drivers on the policy, reason your previous policies were cancelled, etc.) is available to all insurance companies and is used by them as a key factor in determining the rate they can offer you on your car insurance.

And, when you lend your car, you are in effect, lending your car insurance.

Myth Eight: My car was hit when it was parked and I don’t know who hit it. If I make a claim it will be not at fault.

A: Maybe. Most insurance companies require that you report a “hit and run” to the police within 24 hours. If you don’t report it to the police, any payout for the damage may be considered an at fault accident.