Factors that determine motor insurance premiums in India

When you buy motor insurance, you pay a premium to keep your vehicle insured. This amount can be paid yearly or as a single payment, depending on the policy. In return, you receive financial protection against accidents, theft, fire, and other unexpected events.

The premium is calculated using several details. These include your car’s value, age, engine size, and place of registration. Your driving record and the type of coverage you choose also matter.  Understanding the factors affecting car insurance premiums helps you make better decisions and manage your insurance costs in a practical way.

What is a motor insurance premium?

A motor insurance premium is the amount you pay to an insurer to keep your vehicle insured for a fixed period. It is the cost of the protection you receive under the policy. The premium is decided after looking at different risk factors. These include your vehicle details, your driving history, your location, and the type of coverage you choose.

The sum insured, also known as the Insured Declared Value (IDV), is the maximum amount payable if your car is stolen or declared a total loss. The car insurance premium calculation depends largely on the IDV. A higher IDV usually means a higher premium.

For example, if your car’s IDV is ₹5,00,000, the premium will be calculated based on this value after applying depreciation and other relevant factors.

Top 10 factors affecting car insurance premiums in India

Motor insurance premiums in India are calculated after evaluating several measurable risk factors. Each factor helps insurers assess the likelihood of a claim and the potential cost involved. Below is a detailed explanation of the main factors affecting car insurance premiums.

1. Driving history and claim record

A policyholder’s claim history directly influences the premium. Individuals who do not make any claims during the policy year are eligible for a No Claim Bonus (NCB). This bonus reduces the own damage premium at the time of renewal.

As per IRDAI guidelines, the NCB slabs are structured as follows:

If a claim is made during the policy period, the accumulated NCB is generally reduced or reset at renewal. Maintaining a claim-free record, therefore, helps in lowering the renewal premium over time.

2. Driver's age and gender

Age is an important underwriting factor. Drivers below 25 years are statistically associated with higher accident rates and may be charged higher premiums. Drivers above 30 years with more driving experience are generally considered lower risk. While gender-based pricing is not uniform across all insurers, age and driving experience remain relevant in premium assessment.

3. Type of coverage selected

The type of motor insurance policy selected directly affects the premium. It can be broadly classified as follows:

●      Third-party insurance is mandatory under the Motor Vehicles Act. It provides coverage for legal liability arising from injury, death, or property damage caused to another person due to your vehicle. However, it does not cover any damage to your own vehicle.  The premium for third-party insurance is fixed annually by IRDAI and is primarily based on the engine capacity of the vehicle.

●      Comprehensive insurance includes third-party liability cover along with protection for your own vehicle. It covers damages resulting from accidents, theft, fire, natural calamities, and certain man-made incidents. Since it offers broader financial protection compared to third-party insurance, the premium is generally higher.

4. Vehicle make, model and age

The make, model, and variant of the vehicle influence repair and replacement costs. High-end vehicles, imported models, and cars with advanced technology usually have higher spare part costs. As a result, their premiums are higher.

Engine capacity (cc) also affects the premium. Vehicles with larger engines usually attract higher third-party premiums and may also influence the own damage premium.

In addition, the age of the vehicle determines the rate of depreciation applied to the Insured Declared Value (IDV). Depreciation reduces the vehicle’s market value each year, which impacts both the sum insured and the premium.

As the vehicle ages, the IDV decreases due to depreciation. This generally reduces the premium, but it also lowers the maximum claim amount payable in case of total loss or theft.

5. Geographical location/registration city

Premiums vary based on the vehicle’s registration city. Metropolitan cities such as Delhi and Mumbai generally have higher premiums due to dense traffic conditions and higher claim frequency. Zones prone to natural disasters (e.g. floods, earthquakes) may also see higher own damage premiums due to increased risk exposure.

6. Annual mileage

The extent of vehicle usage influences risk exposure. Cars driven frequently are statistically more exposed to road-related incidents. Higher annual mileage may therefore impact premium calculations. Low-mileage drivers typically pay a lower premium.

7. Add-on covers opted

Add-ons like zero depreciation, engine and gearbox protection, roadside assistance, and return to invoice enhance your coverage but increase your overall premium. The final premium depends on the number and type of add-ons selected.

8. Voluntary deductible

A voluntary deductible is the amount the policyholder agrees to pay out of pocket during a claim. Choosing a higher voluntary deductible reduces the insurer’s liability per claim.

As a result, opting for a higher deductible generally lowers the annual premium.

9. Credit score

In India, motor insurance premiums are primarily determined based on vehicle-related and risk-based factors. Credit score evaluation is not a standard practice across the industry. However, certain underwriting assessments may consider broader financial risk indicators as part of internal evaluation processes.

This factor is not uniformly applied and does not form the primary basis of premium calculation in most motor insurance policies.

10. Applicable taxes and regulatory rates

Motor insurance premiums are subject to 18% GST. Third-party premium rates are regulated by IRDAI and vary based on vehicle category and engine capacity. Own damage premiums are determined by underwriting practices, risk assessment, and internal pricing guidelines, while adhering to regulatory norms.

How to reduce your car insurance premium?

Reducing your car insurance premium does not require reducing coverage. With proper planning and informed decisions, you can manage your policy cost while maintaining adequate protection.

The following measures can help lower your premium in a structured and lawful manner:

●      Protect your No-Claim Bonus (NCB): The No Claim Bonus offers a discount of up to 50% on the own damage premium for consecutive claim-free years. Avoiding minor claims helps preserve this benefit. If you sell your vehicle, you may retain the NCB and transfer it to a new vehicle, subject to applicable guidelines.

●      Opt for voluntary deductibles: Selecting a voluntary deductible means agreeing to bear a fixed portion of the claim amount. Choosing a higher deductible, such as ₹5,000 or ₹10,000, can reduce the annual premium. The selected amount should be financially manageable at the time of a claim.

●      Install ARAI-Approved anti-theft devices: Vehicles fitted with ARAI-certified anti-theft devices, such as engine immobilisers or tracking systems, may be eligible for a discount of 2.5% on their own damage premium , as per regulatory norms.

●      Consider Usage-Based Policies: If your vehicle usage is limited, certain usage-based or “pay-as-you-drive” options may offer cost advantages. These policies link premium calculation to declared mileage.

●      Renew before expiry: A lapsed policy may require vehicle inspection before it can be renewed. It may also affect accumulated benefits such as the No Claim Bonus. Renewing the policy before the expiry date ensures continuous coverage and avoids any break in protection.

●      Avoid small claims: Small repair expenses may be paid out of pocket if financially feasible. This helps maintain the NCB and supports lower premiums over time.

●      Careful policy selection and disciplined driving practices can contribute to long-term premium savings.

How to calculate your car insurance premium online?

You can estimate your motor premium using an online calculator available on most insurers’ websites. The calculator provides an approximate premium based on the details you enter.

Typically, you will need to provide the following information:

●      Vehicle make, model, year of manufacture

●      Engine capacity (cc)

●      Registration city or location

●      Driver's age and claim history

●      Type of coverage selected (third-party or comprehensive)

●      Add-ons chosen

●      Voluntary deductible amount

Based on these inputs, the calculator applies regulatory third-party tariff rates, depreciation rules for Insured Declared Value (IDV), applicable taxes, and underwriting factors.

Conclusion

In summary, motor insurance premiums in India are not arbitrary; they are a direct reflection of the risk profile of both the vehicle and the driver. Core components like the Insured Declared Value (IDV), engine cubic capacity, and the vehicle's age form the foundation of the calculation. However, personal choices—such as opting for comprehensive coverage, adding specific riders, or maintaining a claim-free record to earn a No Claim Bonus (NCB)—play an equally vital role.

By understanding these variables, policyholders can move beyond just "buying a policy" to strategically managing their costs. Whether it is installing ARAI-approved anti-theft devices to earn discounts or choosing a voluntary deductible to lower the annual outlay, a well-informed car owner can secure robust protection without overpaying. Ultimately, the goal is to strike a balance between an affordable premium and the peace of mind that comes with adequate coverage.

FAQs

1. How is a car insurance premium calculated in India?

Car insurance premium is based on the vehicle’s Insured Declared Value (IDV), engine capacity, age of vehicle, registration location, driver profile, claim history, type of coverage selected, add-ons opted, applicable third-party tariff rates prescribed by IRDAI and GST.

2. What is the Insured Declared Value (IDV) in car insurance?

IDV is the maximum payable by the insurer in case of total loss or theft. IDV forms the base for calculating the own damage premium.

3. How does No-Claim Bonus (NCB) help reduce car insurance premiums?

NCB offers discounts up to 50% on own damage premium for claim-free policy years, rewarding safe driving.

4. Do add-on covers increase the premium?

Add-ons extend the scope of protection under a comprehensive policy. The premium is adjusted based on the type and number of add-ons selected...

5. Can choosing a voluntary deductible reduce premiums?

Selecting a higher deductible reduces the insurer’s share of the claim amount. This generally results in a lower annual premium. The deductible chosen should be affordable at the time of a claim.

6. Does making a claim affect my premium?

Raising a claim may lead to loss or reduction of the accumulated No Claim Bonus. This can increase the premium at the time of renewal.

7. How do vehicle make and engine capacity affect premiums?

Vehicles with higher engine capacity and premium variants generally involve higher repair and replacement costs. This increases the risk exposure and results in higher insurance premiums.

8. Where can I find IRDAI guidelines on motor insurance premiums?

You can refer to the official website of the Insurance Regulatory and Development Authority of India (IRDAI)  at https://irdai.gov.in to access tariff orders, circulars, and regulatory guidelines related to motor insurance.