A premium is a calculation, not an opinion
Two people insure the same car in the same city and receive quotes that differ by a factor of three. It looks arbitrary. It is not. An insurance premium is assembled from an estimate of what your claims will cost the insurer, plus the cost of running the business, plus a margin, then adjusted by discounts and taxed. Understanding the assembly explains most of the variation and tells you which parts you can influence, so below we take a premium apart line by line.
This is also one of the costs that changes most dramatically when you move country, because the legal system determining what a claim costs is national, and so is the data insurers are permitted to use.
The structure of a premium
Expected claims cost = claim frequency multiplied by average claim severity, summed across each type of cover.
Premium = expected claims cost, divided by one minus the expense and margin loading, then adjusted by rating factors and discounts, then increased by insurance premium tax.
Frequency is how often a claim happens, expressed as claims per policy year. Severity is what a claim costs when it happens. They are estimated separately because they respond to different things. A city increases frequency because there are more vehicles to hit. An expensive car increases severity because repairs cost more. The two combine multiplicatively, which is why an expensive car in a dense city is not slightly more expensive to insure but a great deal more.
The covers are priced separately
- Third party liability. Damage and injury you cause to others. Compulsory almost everywhere. Severity is driven by the legal system, particularly how bodily injury and long term care are compensated, and whether limits are capped or unlimited.
- Own damage, sometimes called comprehensive or casco. Damage to your vehicle. Severity tracks repair cost, parts availability and labour rates.
- Fire and theft. Driven by local theft rates and by how attractive and easy to dispose of your model is.
- Glass, legal expenses, roadside assistance, replacement vehicle. Small individually, but they accumulate and are often bundled without being requested.
A hypothetical worked example
All figures are invented to demonstrate the arithmetic. They are not premiums or claims data from anywhere.
Suppose the liability cover has an expected claim frequency of 5 percent a year and an average severity of 8,000. Expected cost is 0.05 multiplied by 8,000, which is 400.
Suppose own damage cover has a frequency of 12 percent and an average severity of 2,500, and suppose you carry a deductible of 500, so the insurer’s average payout is 2,000. Expected cost is 0.12 multiplied by 2,000, which is 240.
Total expected claims cost is 400 plus 240, which is 640. Suppose expenses and margin absorb 30 percent of the premium. The premium before discounts is 640 divided by 0.70, which is 914. Suppose your no claims record earns a 40 percent discount, giving 914 multiplied by 0.60, which is 549. Suppose insurance premium tax is 10 percent, so the amount you pay is 549 multiplied by 1.10, which is 604.
Testing the deductible
Now raise the deductible from 500 to 1,000 in the same invented scenario. The insurer’s average payout on own damage falls to 1,500, so expected cost becomes 0.12 multiplied by 1,500, which is 180. Total expected claims are 580, the premium before discount is 580 divided by 0.70, which is 829, after the 40 percent discount 497, and after tax 547.
You save about 57 a year. Your extra exposure is 500 more per claim, at a 12 percent claim frequency, so an expected extra cost of 60 a year. In this constructed case the higher deductible is very slightly worse in expectation and better for cash flow only if claims do not occur. That is the correct way to evaluate a deductible: compare the premium saving against the extra exposure multiplied by the frequency, rather than assuming a higher deductible is automatically economical.
Rating factors and what you can change
| Factor | Why it affects the premium | Can you influence it? |
|---|---|---|
| Vehicle model and repair cost | Drives severity through parts, labour hours and body materials | Yes, at the point of choosing the car |
| Engine power and performance | Correlates with both frequency and severity | Yes, by variant choice |
| Theft attractiveness and security | Drives theft frequency and recovery rates | Partly, through approved alarms, trackers and immobilisers |
| Annual distance and use class | More exposure means more frequency. Business use costs more than private | Yes, and it must be declared accurately |
| Overnight parking location | Theft and damage rates differ street by street | Partly, through a garage or secure parking |
| Claims history and no claims record | The strongest single predictor insurers use | Over time, and by not claiming for small losses |
| Licence tenure and driving record | Experience correlates with lower frequency | Only with time |
| Named drivers | The risk pool for the vehicle changes | Yes, and misdeclaring is a policy breach |
| Deductible and cover limits | Directly changes the insurer’s share of each loss | Yes |
| Legal environment | Compensation rules and litigation costs set liability severity | No, but it explains cross border differences |
| Insurance premium tax | Applied on top of the premium | No |
What changes when you move country
- Your no claims record may not transfer. Some insurers accept a letter of experience from a foreign insurer, others do not, and some accept it partially. Ask before you cancel the old policy, and request the letter in writing while you still hold it.
- Bonus malus systems differ. Several countries operate a formal scale with defined steps up and down, sometimes attached to the person and sometimes to the vehicle.
- Compulsory minimum cover differs. Minimum liability limits vary enormously, and the minimum is not always adequate.
- Permitted rating factors differ. Regulation restricts the use of certain characteristics in some jurisdictions and not in others, which changes who subsidises whom.
- Territorial limits. Check which countries your cover extends to, and at what level, if you plan to drive across borders.
Practical steps
Obtain quotes before you buy the car, not after, because the model is the input you can still change. Get several quotes on identical cover terms, since a cheaper premium with a higher deductible and lower limits is not a cheaper policy. Read what is excluded rather than what is included. Declare use, distance and drivers accurately, because a misstatement can void a claim at the worst possible moment.
Insurance regulation, compulsory cover, tax on premiums and the treatment of foreign claims history vary substantially by country. We would confirm the specifics with licensed insurers or a regulated broker in the relevant market rather than assuming your home country’s conventions apply. This article explains pricing mechanics as general information and is not personalised financial or insurance advice.
How to Use This Guide
Every worked example on this page is illustrative. The figures are chosen to show how the calculation behaves, not to report current market rates. Costs, tax rules and eligibility criteria differ by country and change over time, so take the method from this page and put your own current figures into it. Browse the rest of our guides, or see how we source and check our comparison figures on the about page.
Information only. This article explains how costs and rules are structured. It is not financial, tax, legal or immigration advice, and it is not a recommendation to buy any property, vehicle or investment. Confirm anything that affects a decision with the relevant local authority or a qualified professional before you act on it.
Last updated: August 14, 2026