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

Although it may seem logical that, as a vehicle’s value depreciates over time, the insurance premium should follow suit, this is rarely the case. Far from being unfair on policyholders, there are a couple of reasons why a decrease in insurance premiums is not necessarily possible.

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.

Premiums tend to increase in line with inflation as time goes by. 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.

Why does your car's insurance premium go up while your car's value depreciates?

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 parts are sourced from other countries.

With these among the major influences on insurance premiums, the reason that they don’t automatically decrease as a car gets older becomes clearer. It could be a good idea to consider fixing your car insurance premium for two or three years, an option available from MiWay.

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