How Insurers Calculate Motor Insurance Premiums
When customers ask, “Why is my premium this much?”—it’s your chance as an agent to build trust by explaining how premiums are calculated. Motor insurance premiums are not random—they’re based on specific risk factors, regulations, and add-ons.
🔑 Components of Motor Insurance Premium
Third-Party Liability Premium
Fixed by IRDAI (not the insurer).
Based on engine capacity (cc) or vehicle category.
Mandatory under the Motor Vehicles Act.
Own Damage (OD) Premium
Calculated as % of Insured Declared Value (IDV) of the vehicle.
Varies by vehicle age, make, model, usage, and geography.
Discounts may apply (e.g., NCB).
Personal Accident (PA) Premium
Compulsory cover for owner-driver (fixed amount, currently ₹15 lakh PA cover).
Optional PA for passengers and paid drivers.
Add-On Covers
Extra premium for covers like Zero Depreciation, Engine Protect, RSA, Consumables, etc.
Loading / Discounts
Loading: Higher premium for adverse risk (e.g., young driver, accident history).
Discounts: NCB, anti-theft devices, membership of AAI/ARAI, etc.
GST
18% GST is added on the total premium.
📊 Example: Premium Calculation for a Car
Let’s take an example of a Private Car (Petrol, 1200cc, IDV ₹6,00,000, Age 2 years, no claim in previous year):
Third-Party Liability Premium (IRDAI fixed): ₹3,221
Own Damage Premium (say 2.5% of IDV): ₹15,000
Less NCB @20%: -₹3,000 → Net OD: ₹12,000
PA Cover (Owner-Driver): ₹350
Add-Ons (Zero Dep + RSA): ₹5,000
Total Premium (before GST): ₹20,571
GST @18%: ₹3,703
Final Premium = ₹24,274
💡 Sales Pitch Tips for Agents
Break it down: Customers like transparency. Show them how every rupee is calculated.
Highlight savings: Stress how NCB and discounts reduce premiums.
Promote add-ons: Position them as “small extra premium, big peace of mind”.
Show comparison: Without Zero Dep = lower premium, but higher repair costs later. With Zero Dep = slightly higher premium, but full settlement.
✅ Conclusion
Motor insurance premiums depend on a mix of regulated charges (TP premium), risk-based pricing (OD premium), and customer choices (add-ons, PA cover). For sales professionals, explaining this clearly turns insurance from a “cost” into a value-for-money safety net.
👉 Simple line for customers: “Your premium is like a recipe—part law, part risk, part choice. The better the mix, the better the protection.”