Why are Car Insurance Premiums Rising Every Year?

Buying car insurance requires a lot of factors to be considered instead of just finding the lowest premium. It isn’t merely about finding the best car insurance company or getting your hands on the best car insurance rates, but also about the coverage that you get. We all know that third-party motor insurance is mandatory to ride a bike or drive a car on the road, but if you are selecting this basic cover, you are obviously not getting any coverage for yourself or your car. That’s because third-party cover only secures you against the third-party claims of any damage and loss to their property in case of an accident.


Hence, buying a comprehensive insurance policy after comparing car insurance policies online is the best thing to do in order to make the right choice. And when it comes to doing that, it usually boils down to the premium that you pay to avail the insurance coverage.

Did you know that every year the Insurance Regulatory Development Authority (IRDA) revises premium rates for motor insurance? If you have no idea why the car insurance premiums are rising and how the rising car insurance rates impact you, don’t worry! We’ll take you through it right from the start.

What is Car Insurance Premium?

Every insurance policy that you buy comes at a cost which is called the premium. So, premium is the money that you pay to your insurer in order to avail coverage for the perils covered by the policy.

In simple terms, when you’re paying premiums, you’re basically paying for financial protection. So, obviously your goal would be about getting your hands on the best car insurance rates. Before you can do that, you need to understand about the factors that impact car insurance premiums.

Factors that Impact Car Insurance Premiums

To start with, you must understand that motor insurance rates aren’t random numbers that you are asked to pay by your insurance providers. There are a lot of factors that are taken into account in order to determine your insurance premium. In reality, car insurance premium is a lengthy and complex calculation. There are certain factors that are considered to decide insurance premiums, which include:

  • Age
  • Gender
  • Marital status
  • Geographical location
  • Driving experience in years
  • Driving record
  • Previous insurance coverage
  • Insurance claim history
  • Credit history
  • Vehicle type
  • Vehicle use
  • Miles driven annually
  • Coverage and deductibles

When buying insurance it is very important to understand the factors that can have an impact on your insurance premiums. To ensure that your insurance premiums are not too high, it is important to put yourself forth as a safe customer.

Why Motor Insurance Premiums Increase?

The Insurance Regulatory and Development Authority (IRDA) is an authority in India which formulates guidelines for insurance policies, and every general insurance company in India has to adhere these guidelines. Insurers should avail motor insurance policies only from companies registered with the IRDA.

Like any other business, insurance companies need to have higher revenue than expenses in order to stay in the industry. Motor insurance companies have to fulfill their obligation to reimburse for the insured’s damages.

IRDA decides the TP or third-party insurance rates. These rates vary based upon the type and capacity of the car. The premium for covering the damages to a motor vehicle insured under a comprehensive policy depends on your vehicle’s make and model. This is exactly the reason why the premium of a 10 year old car is lower than the premium of a 5 year old car.

Now let’s look at the reasons why IRDA revises third-party premium rates –

  • Inflation

During periods of high inflation when the economy is in turmoil, insurance companies may have to raise their rates to counter balance the effect of the car insurance claims. An increase in the number of claims could negatively affect the insurance company’s financial backing, which is why raising premium rates is a valid option to go with.

However, if an insurance company has a strong financial backing in the times of a bad economy, they may lower their rates to become more competitive with other financially stable insurance providers.

  • Incurred Claims Ratio

Incurred claims ratio is the total number of motor insurance claims filed in the previous year. IRDA analyses data throughout the country in order to revise the premium rates. Every motor insurance buyer pays a small amount (premium) to his/her insurer, and in turn the insurance company pays a large amount in case of accident or damages. In this case, the IRDA is very strict with insurance companies so that they do not reject the insurance claims filed by their respective customers. However, too many claims in one year can make IRDA to revise the premium rates, as it can make insurance companies get into losses.

So basically, IRDA is the regulatory body that decides the premium rates of insurance in India. All rules on insurance companies, products, claims, grievances, etc. are supervised by this body.

Motor insurance and Goods and Service Tax (GST)

Before the rollout of the Goods and Service Tax, the tax rate on motor insurance premium was 15%. However, after the implementation of GST, the tax rate increased to 18%, and this in turn has impacted an increase in the car insurance premium rates.

To buy a car insurance policy with affordable premium rates, make sure you compare car insurance products online, and opt for the coverage that is required according to your need. Look for the best car insurance companies that are reputed and have a good claim settlement ratio to ensure hassle-free settlement of claims.