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Does The Manufacturer’s List Price Affect My Car Insurance Rate?

June 15, 2010

You may have heard that the more expensive a car, the more you will pay in car insurance premiums. Although this used to be the norm in the past, it is not necessarily the case today. Take for example two drivers with identical driving profiles who have purchased new vehicles.

One driver purchases a 2008 Honda Accord with an MSRP of $23,960. The other driver purchases a 2008 Volvo V70 with an MSRP of $32,465. Who do you think will pay the higher insurance premium? Suprisingly, the Honda driver’s insurance will cost $2,850 while the Volvo driver’s insurance will cost just $2,205.

Problems with MSRP

Prior to 1995, insurers used the manufacturer’s suggested retail price (MSRP), together with some very basic information about the vehicle, as a key factor in determining a portion of your car insurance premiums. Vehicles that had similar MSRPs would be classified into a common rate group, which would then result in similar insurance premiums. However, it was later determined that using the MSRP alone was an inaccurate measure for setting insurance premiums, as it failed in the following areas:

  • The MSRP does not serve as a good indicator of potential future repair costs.
  • Safety features such as anti-lock brakes, airbags, and theft deterrent systems, which could lower the likelihood of claims and costs, are not taken into consideration.
  • The claim frequency, or severity of potential claims, cannot be predicted based on vehicle price alone.
  • Vehicles with similar MSRPs do not necessarily depreciate at the same rate.
  • Vehicles may exhibit different types of claims historically.

The CLEAR rating method

Today insurers instead use a method called Canadian Loss Experience Automobile Rating or CLEAR rating to determine the insurance premium for your vehicle.  Using the CLEAR rating method allows car insurance companies to predict future claims more accurately. And this in turn rewards vehicle owners for buying vehicles that experience fewer claims and smaller losses.

The CLEAR rating method is used by all insurance companies. It takes into account key vehicle information, rather than just the vehicle’s purchase cost, to determine insurance premiums. Some of the key factors affecting the insurance premium of a given vehicle under the CLEAR rating method system are:

  • Actual claims experience including collision, comprehensive, direct compensation, property damage and accident benefits.
  • The amount a potential claim is likely to cost the insurance company.
  • Probability of theft.
  • Safety features such as anti-lock brakes, airbags and theft deterrent systems.

For more information on the CLEAR rating method check The Insurance Bureau of Canada’s website at www.ibc.ca