Are Car Insurance Premiums Calculated Fairly?

Posted by Jamie Mackenzie Smith in Personal Finance on 12 February 2018

Recently news stories have emerged alleging that a “John” might be more likely to get a cheaper car insurance quote than a “Mohammed”, and that someone with a Gmail account could be offered a lower premium than someone with a Hotmail email address.

Unsurprisingly, the insurance companies involved have rebuffed the claims but it does beg the question – where do the boundaries between ‘fair’ pricing for risk and discrimination sit?

How quotes are worked out

For as long as there has been car insurance, there has been the inescapable truth that some people get charged more than others for the privilege of covering their car. There are obvious factors that contribute to your premium such as the type of car you own, whether you live in an area known for car crime and if your driving style means your car spends more time on its roof than on its wheels.

But there are also more personal elements involved, which some people feel unfairly increase the cost of cover.


This has been a hot topic in recent years, with the EU introducing a law in 2012 that prevented insurance companies from basing their premiums on gender. Prior to this ruling, there was often a considerable gap between quotes given to men and women. This variance was largely caused by the fact that - on average - women are involved in fewer collisions than men.

Regardless of this fact, it was ruled unfair that gender should be an influencing factor for an insurance quote, which had the knock-on effect of causing the average cost of car insurance for females to go up – leaving everyone equally unhappy.

Years later however, analysis shows that females still seem to get lower insurance quotes than males when taken as an average, but the reasons behind it aren’t due to gender discrimination. The main reason is that statistically-speaking, women are less likely to work in jobs identified as most likely to be linked with road traffic incidents or driving convictions, so it’s down to job and not gender - which means there’s more to premium calculations than meets the eye.


Age is one of the big things taken into account when working out your premium, which again can be seen as unjust: Max Verstappen was just 18 years old when he won the 2016 Spanish Grand Prix, but he’d still have been charged over the odds to insure a Peugeot 106. Regardless of what your job is, if you’re young, you’re going to have a bad time when insuring a car.

It’s just as bad for older drivers too, owing to the fact that both younger drivers and drivers of a more advanced age account for a larger number of collisions. Age seems to be one area that the insurers aren’t willing to budge on and it seems widely-accepted that if you’re under 25 or over 65, you should expect costs to be unkind.

The world of credit is similar, with gender no longer being factored into your overall rating but age still having an impact. The two industries also have links, with insurers relying on credit file data for a number of the checks they carry out.

Why do insurance companies check my credit file

Insurers can use your credit file for a couple of different reasons. For the most part a soft search is carried out on your credit file to verify you are who you say you are and that your name, age and address matches the details you’ve provided them. Credit file data is often also used to help combat Insurance Claims Fraud. This type of search (used when getting a quote) won’t hurt your credit rating at all.

If you’re one of the many motorists who chooses to pay their insurance premiums monthly, you may be subject to a full credit check, which could also determine the interest rate you’ll pay. This is because some insurers treat monthly payments as a credit agreement, so it is treated as if you are applying for a loan (but with a much less-strict acceptance criteria). This is sometimes done with an external finance company, and the agreement you sign will look very much like any other form of finance you might apply for.

How does my credit report affect the cost of insurance?

While the insurers themselves have worked out a reasonable premium for your vehicle based on their own criteria, when it comes to the amount they will charge for the benefit of spreading payments across the year, they may choose to charge you more after viewing your credit file if they deem that you pose an increased risk of missing payments.

So while your credit file won’t affect your annual insurance premium, it might affect your monthly repayments. Paying monthly could add an estimated 20% to the average premium.

Searches carried out by car insurers and comparison sites will appear on your credit report, but they are not likely to cause any issues when applying for credit. Even if you’re shopping around for a quote and end up using a number of comparison sites, generating more searches, you’re unlikely to be affected.

Do car insurance payments appear on my credit report?

No. Your monthly car insurance payments will not appear on your credit report, even though your credit file is checked prior to you taking out the insurance. This might seem counter-intuitive, but car insurance isn’t alone; there are plenty of other monthly payments that don’t appear on your credit file.

The only time your insurance might appear on your report is if you default on a payment, or get into serious arrears. In this case, the insurer (or the finance arm) may reserve the right to record the negative information against you, and start debt collection proceedings – both of which will likely increase the amount you pay next year, or lead to you being declined insurance at all.

With the recent news that some rent payments will contribute to your credit score, maybe it’s time insurance providers started to think about reporting your positive payments as well.

So while car insurers won’t factor in what race or gender you are when calculating your premium, they will have a look at your credit report. Ensuring that the information on your credit report is right, will make it easier for a potential insurer to verify who you are, and also improve your chances of being accepted for monthly payments, if you apply.

If you’re not already a member, you can try checkmyfile FREE for 30 days and then for just £14.99 a month afterwards, which you can cancel at any time.

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