Auto insurance is a system which allows individuals to spread the risk of owing and operating a vehicle. With the large number of vehicles on the roads these days a certain percentage of them are going to be involved in a collision, destroyed by fire or stolen. To protect against the financial burden associated with these risks people purchase auto insurance policies which allow them to effectively pool the risks involved with all the other drivers out there.
How does it work?
Every auto insurance policy holder makes regular payments (the premium) into a large pool of funds which is managed by an insurance company. The insurance company will invest the pool of funds into a basket of conservative investments which are regulated by the Canadian government to insure fiscal responsibility.
If a policy holder has their car damaged in a collision, damaged by other means or has their car stolen then that policy holder would make a “claim” with the insurance company. If the policy holder is coverage for the particular type of claim then the insurance company will pay out money from the pool of funds to cover the expenses associated with the claim being made.
What are the components of car insurance?
In most Canadian provinces accident benefit coverage and third party liability coverage are mandatory while collision coverage and comprehensive coverage are optional.
Accident Benefits
Accident Benefits coverage pays for medical treatment, income replacement and other benefits to help you heal if you are injured in a collision. Accident benefits are also called “no-fault benefits,” which means they are paid to you by your own insurer regardless of who caused the collision.
Third-Party Liability
In most provinces, the person who did not cause the collision has the right to sue the at-fault driver for additional costs and damages not covered by Accident Benefits. Third-Party Liability covers you for the legal costs of being sued if you are the at-fault driver.
Collision Coverage
Collision Coverage covers the cost to repair or replace your vehicle if you are in an accident where you are at fault. Insurance companies will often offer a deductible option which is basically the fixed amount your are filling to pay for each claim out of your own pocket to share in the cost of the claim.
Comprehensive Coverage
Comprehensive auto insurance covers theft, fire, vandalism, weather damage, riots, missiles, and other similar circumstances which may cause damage to a vehicle. Comprehensive auto insurance does not usually cover acts of God, theft or vandalism by family members or employees, contents of the vehicle, tires, or damage due to improper maintenance.
How are premiums (payments) calculated?
Car insurance premiums are calculated based on a number of factors. The factors that have the largest influence on the premium amount include….
Where you live
If you live in a busy city the risks of an accident or car theft are higher which increases premiums
The type of vehicle you drive
Different types of cars are cheaper to insure then others. Some cars have higher safety rating leading to lower accident benefit payouts and some cars are cheaper to repair or replace if a collision or theft occurs.
How you use your car
The more you drive your car (KMs) the higher the risk of a collision.
Your driving record
Drivers with numerous at-fault accidents or driving infractions (tickets) are a higher risk to insure and thus have higher premiums
Your statistical Group
Premiums vary based on the statistical group that you fall into such as years of driving experience, age and gender.
And thats all there is to it. On the surface an auto insurance policy can seem complicated, but when broken out it really isn’t all that scary. Most insurance companies are good with respect to explaining everything if you make the point of asking for the information.
For more information on car insurance visit the Canadian Auto Insurance Bureau website.
