Car insurance is a legal necessity in the UK, and so as every motorist has to have it, it’s important to understand how it works and what to look for in a policy. Here we look at the key components of car insurance to put you on the road to a better deal.

This should give those who are about to take driving lessons some idea as to the factors determining car insurance.

What is car insurance?

Depending on the level of cover you take out, car insurance can help drivers cover the cost of driving related damages and injuries. There are three levels of car insurance cover available:

- Third party car insurance: The minimum level of insurance, it covers liability for injury to others, including passengers; liability while towing a caravan or trailer; and damage to property.

- Third party fire and theft car insurance: The same as third party cover but with additional protection against fire damage, theft of your vehicle and damage caused by theft.

- Comprehensive car insurance: Covers everything offered by third party fire and theft but with additional cover elements that vary from insurer to insurer but typically include: loss or damage to your vehicle; accidental damage; personal effects; windscreen cover; and more.

 What influences car insurance premiums?

When you take out car insurance, insurers ask a number of questions to help identify the risk they are taking on. The higher they perceive this risk to be – i.e. the more likely you are to make a claim – then the higher your premiums are likely to be.

 This perceived risk is influenced by a number of factors including:

- The vehicle you drive – How much it’s worth; its age; repair times; damage and parts costs; body shells; performance; and security. The Association of British Insurers classifies cars into groups from 1-50 with those appearing in lower groups qualifying for cheaper premiums.

- How you plan to use the vehicle – Will you use the car for day to day driving only; for commuting; or will you use it for business or commercial travel?

- Your address – Where you live influences premiums because certain areas have higher volumes of traffic increasing the likelihood of an accident; and some areas have higher crime rates increasing the chances of theft or vandalism.

- Your circumstances – Insurers look at a driver’s claims history; whether they have driving convictions; medical conditions that may affect their ability to drive; their occupation – some jobs are higher risk, such as when someone carries goods in their vehicle; and their marital status – married drivers are generally considered more responsible.

- Mileage – The more time you spend on the road, the more likely you are to have an accident.

 - Additional drivers – Insurers will look at any named drivers on your policy. Experienced drivers with clean records may even earn discounts on a policy, but younger drivers, under the age of 25, or drivers with poor driving records are likely to increase premiums.

Why is protection against uninsured drivers important?

If you are in an accident with an uninsured driver in which they are at fault, they do not have cover in place to repair your car or pay for medical expenses. According to the Motor Insurers Bureau in 2007, there were 1.7million uninsured motorists on the UK’s roads with the AA estimating that they add around £40 to every policy bought by law-abiding road users.

What is a no-claims bonus and why is it important?

A no-claims bonus is effectively a reward for those that don’t make a claim on their policy. This discount applies on a ‘no claim’ basis and not on a ‘no blame’ basis – so if you make a claim for an accident that wasn’t your fault, it will still affect your no-claims bonus unless your insurer recovers its costs from the other driver’s provider.

 Generally for every claim you make you will lose two years’ no-claims bonus; and most policies apply a limit on their discount levels – typically around four or five years. Not only do no-claims bonuses potentially lower premiums, but they also encourage safer driving.

What is no-claims discount protection?

Once you have reached the maximum discount level you can normally pay an additional premium to protect your no-claims bonus. This means that if you make a claim you will still receive the maximum discount on the policy – although there is a cap on the number of claims you can make before you lose this protection.

Crucially, don’t assume that because you have built up a no-claims discount your premiums cannot rise. The discount is taken off what you otherwise would have paid – and premiums could still increase based on other risk factors.

What is an excess?

An excess is the amount you pay towards a claim. Generally this is split into a compulsory excess – an amount set by your insurance company; and a voluntary excess – an additional amount that you choose to pay towards a claim. The voluntary excess should always be set at an affordable level in case a claim is necessary.