Introduction

Understanding how your car insurance premium is calculated can help you make smarter financial decisions. Many policyholders focus only on the final premium amount without knowing the factors that influence it. However, insurers follow a structured underwriting process based on regulatory guidelines, risk profiling, and statistical data.

In India, car insurance pricing is governed partly by regulatory frameworks and partly by insurers’ internal risk assessment models. As per the Insurance Regulatory and Development Authority of India, third-party premiums are regulated, while own-damage premiums are determined by insurers.

Let’s break down exactly how car insurance premiums are calculated in India.

1. Components of Car Insurance Premium

A car insurance premium is broadly divided into two parts:

A. Third-Party Premium

This is mandatory under the Motor Vehicles Act. The premium rates for third-party insurance are fixed by the regulator and depend primarily on engine capacity.

It covers:

• Injury or death of a third party
• Third-party property damage
• Legal liabilities

Since these rates are standardized, insurers cannot modify them.

B. Own Damage (OD) Premium

This portion covers:

• Damage to your vehicle due to accident
• Theft
• Natural disasters
• Fire
• Vandalism

The own damage premium is where most calculations and variations occur.

2. Insured Declared Value (IDV)

IDV plays a central role in premium calculation. It represents the maximum sum insured payable if the car is stolen or declared a total loss.

How IDV Is Determined:

• Manufacturer’s listed selling price
• Depreciation based on vehicle age

Higher IDV = Higher premium
Lower IDV = Lower premium (but reduced claim payout)

Insurers apply standard depreciation rates depending on the car’s age, which directly impacts IDV and premium.

3. Vehicle Make, Model, and Variant

Your car’s technical specifications significantly influence premium.

Insurers evaluate:

• Engine capacity (CC)
• Fuel type (petrol, diesel, CNG, electric)
• Ex-showroom price
• Safety rating
• Claim history of that model

High-end luxury vehicles and sports cars attract higher premiums due to:

• Expensive spare parts
• Higher repair costs
• Increased theft probability

4. Location of Registration

The city where your car is registered affects risk assessment.

Metropolitan cities like Delhi or Mumbai often have higher premiums due to:

• Dense traffic
• Higher accident rates
• Increased theft risk

Smaller towns generally attract lower own-damage premiums.

Insurers classify cities into zones, and risk exposure varies by zone.

5. Vehicle Age

As your car ages:

• IDV reduces due to depreciation
• Repair frequency may increase
• Premium structure changes

Typically:

• New cars have higher IDV and higher premium
• Older cars have lower IDV but may have higher maintenance risk

After 8–10 years, many policyholders reassess whether comprehensive coverage remains financially viable.

6. No Claim Bonus (NCB)

NCB is a discount offered for claim-free years.

NCB Slabs:

• 20% after first claim-free year
• 25% after second
• 35% after third
• 45% after fourth
• 50% after fifth consecutive claim-free year

NCB applies only to the own-damage premium. It significantly reduces renewal cost and encourages responsible driving.

7. Add-On Covers Selected

Add-ons increase premium because they enhance protection.

Common add-ons:

• Zero Depreciation Cover
• Engine Protection
• Return to Invoice
• Roadside Assistance
• Consumables Cover

Each add-on increases risk coverage, which increases the premium accordingly. The final premium reflects the cumulative cost of selected add-ons.

8. Deductibles (Compulsory and Voluntary)

Every policy includes a compulsory deductible set by regulation. In addition, policyholders can opt for a voluntary deductible.

• Higher voluntary deductible → Lower premium
• Lower voluntary deductible → Higher premium

Deductibles reduce insurer liability, which lowers pricing.

9. Driver Profile and Risk Assessment

Although less visible, insurers may consider:

• Age of the driver
• Driving experience
• Past claim record
• Previous policy history

A clean claim history lowers perceived risk and reduces premium.

10. Anti-Theft and Safety Features

Cars equipped with certified anti-theft devices or advanced safety systems may attract discounts.

Insurers view:

• Central locking systems
• GPS tracking
• ARAI-approved anti-theft devices

Lower theft probability leads to marginal premium reduction.

11. Policy Tenure

Long-term policies (especially for new cars) sometimes offer better value. Bundled policies combining third-party and own damage for multiple years may provide pricing advantages compared to annual renewals.

Sample Formula for Own Damage Premium (Simplified)

While insurers use proprietary actuarial models, a simplified conceptual formula looks like:

Own Damage Premium = (IDV × Base Rate) – NCB + Add-On Cost – Discounts + Taxes

The final premium also includes GST as applicable under Indian tax laws.

Why Premiums Differ Between Insurers

Even with the same car and profile, premiums can vary because insurers use different:

• Risk assessment models
• Claim data analytics
• Operational cost structures
• Target customer segments

This is why comparing policies before purchase is essential.

Conclusion

Car insurance premium calculation in India is a structured process influenced by regulatory guidelines, vehicle-specific details, risk exposure, and policy customization choices. While third-party rates are standardized, own-damage premiums depend on multiple dynamic factors such as IDV, vehicle age, city, NCB, add-ons, and deductibles.

Understanding these elements empowers you to make informed decisions, avoid overpaying, and choose coverage aligned with your financial goals.

If you are planning to buy or renew your policy, Square Insurance helps you compare options transparently, understand premium components clearly, and select plans that balance cost with comprehensive protection.

Frequently Asked Questions

1. Who decides third-party car insurance premium in India?

Third-party premiums are regulated by the Insurance Regulatory and Development Authority of India (IRDAI).

2. Does higher IDV always mean better coverage?

Higher IDV increases claim payout in total loss cases but also raises premium. It should reflect realistic market value.

3. How can I reduce my car insurance premium?

You can reduce premium by maintaining NCB, opting for voluntary deductibles, avoiding unnecessary add-ons, and comparing insurers.

4. Is GST included in car insurance premium?

Yes, GST is added to the final premium amount as per applicable tax regulations.

5. Does city of registration affect premium?