Ricochet News

Why your insurance premiums don't decline as your car gets older

Jan 26, 2017
Why your insurance premiums don't decline as your car gets older

With cars depreciating in value the second they leave the showroom, it is only fair that the insurance premium should also decrease over time; but that is highly unlikely.

*Depreciation means the value of an item decreases over time. In the case of cars, loss of value is also influenced by wear and mileage.

There are a few reasons why insurance premiums do not decrease.

One of the primary reasons why insurance premiums cease to decline is because the increase imposed is in line with inflation. In addition, the cost of repairs goes up year on year. It doesn’t cost any less to replace the bumper on a one-year-old vehicle than it does on a brand new one. The cost of parts, paint and labour increases each year. Doing the same repair job to the same car will cost more in future years, even though the value of the car is less. In addition, with the lion’s share of claims coming from accident damage, the reduced total value of the vehicle has little bearing on the price of the premium.

While the threat of theft of a vehicle or even a total write-off occurring following a particularly bad accident is real, this risk is far lower than that of accident damage. It is also therefore a correspondingly small percentage of the premium paid.

Understand your cover

In many instances, policyholders may not have read through their policy documents and don’t know what they are (and are not) covered for. This gives rise to the perception that the policy provides cover for the purchase price of the insured vehicle. As the value of their car depreciates over time, the policyholder expects the insurance premiums to do the same.

Understand the insured value of your vehicle

Cars are not insured for their purchase price; instead, policyholders can choose between insuring for the retail, market or trade value of the vehicle:

  • ‘Retail’ is the price a vehicle carries on a showroom floor.
  • ‘Trade’ is the price a dealer will pay for your car.
  • ‘Market’ is the average of trade and retail.

Values also take into account the condition and mileage of the vehicle.  There are no guideline adjustments for service history and accidents, but these are included when assessing the condition.

Other factors determining insurance premiums

Other factors, which are accounted for in the determination of premiums, include:

  • Inflationary pressure, which can increase car insurance premiums.
  • Premiums are recalculated after a claim, with a new assessment of your risk profile.
  • The exchange rate also plays a role as some vehicle parts are sourced from other countries.

The above mentioned factors are some of the major influences on car insurance premiums and the reason they don’t decrease as your vehicle gets older becomes clearer and easier to understand.