Why is my insurance premium going up if my car is getting older?
We get this question often. Every year as your car gets older the value of it decreases (with some exceptions such as collector vehicles). So why doesn't your insurance premium go down?
There are many factors that determine your insurance premium. The replacement value of your car is only one such factor. Can you think of some others? Here are a few...safety features, claim history, susceptability to theft.
Now, if the only claims that were paid involved a total loss of the vehicle, then it would make sense that as the value of the auto decreases, the premium would also go down. But most claims are for repair of the vehicle. And the costs to repair a vehicle generally increase every year. Paint is more expensive. The friendly mechanic that works on the vehicle may have gotten a raise so labor costs increase. The shop may find their costs going up and so they charge more. And now that your vehicle is older, it may be more difficult (ie more expensive) to find the parts needed to repair the car. All of these can provide upward pressure on the cost to insure your vehicle while the age of the vehicle may provide some downward pressure.
Let's say your vehicle has a 'book value' for replacement of $10,000 in year 1. If your car is in an accident and it costs $6,000 to repair, you get a check for $6,000 (less your deductible). In year 2, your replacement value has decreased to $9,000. Again you have an accident and the vehicle is repairable with identical damages from last year, but now it costs $6,300 (a 5% increase) to repair your vehicle.
I don't have statistics on the exact number of claims that involve repair vs. total loss. But from my 30 years experience in the industry, I feel confident in stating that a large percentage of claims involve repair of the vehicle. Let's use 90% repair vs. 10% total losses and apply the math to the scenario above for 1,000 claims.
Here we'll put some of our math skills to work...yikes!
1,000 claims x 90% can be repaired = 900 repaired cars
900 repaired cars x $300 increased repair costs year over year = $270,000 increased claim expense
1,000 claims x 10% are total losses = 100 total losses
100 total loss claims x $1,000 decreased total loss value year over year = $100,000 decreased claim expense
$270,000 - $100,000 = $170,000 total increase claim cost
These figures are only illustrative and not indicative of the actual changes, which could be more or less pronounced.
But here's another factor to keep in mind, claim costs include things other than the damage to your vehicle. Your insurance pays medical costs, which continue to increase every year. Insurance also pays if you are sued for injuring someone else. Verdicts continue to climb.
So you can see that if you buy an insurance policy that will only pay if you total your vehicle, then it would make sense for the premium to decrease as the value of the vehicle decreases. But, lucky for you, that is not the only thing your policy covers! If you are concerned about saving money (and who isn't?) on your insurance, set up a review with your insurance professional to talk about what is right for you.