Questions We Get Asked – Premiums up and Value down on cars

Questions we get asked.

Insurance premiums on motor vehicles often increase each year, even as the replacement cost (market value) of the vehicle declines. This apparent contradiction is due to several key factors:

Why Insurance Premiums Rise Even as Vehicle Value Falls

1. Rising Repair and Parts Costs
   
   
   • The most significant driver of increasing premiums is the rising cost of repairs and replacement parts, largely due to inflation. Even if your car is worth less each year, the cost to fix or replace its parts—especially with modern vehicles equipped with advanced technology—continues to rise.
   • Labour shortages in the automotive repair sector and the need for specialized skills (such as for electric vehicles) have also pushed up repair costs.
     
     
2. General Inflation
   
   
   • Inflation affects all aspects of the insurance industry, from administrative expenses to the cost of claims. As the cost of living and doing business increases, insurers pass these costs onto policyholders through higher premiums.
     
     
3. Increased Frequency and Severity of Claims
   
   
   • There has been an increase in both the number and severity of claims, including more vehicles being declared total losses after accidents. This trend increases the risk exposure for insurers, prompting them to raise premiums to cover potential payouts.
     
     
4. Other Contributing Factors
   
   
   • Insurance premiums are influenced by more than just the value of your car. Factors such as your driving history, location, age, and the type of coverage you choose all play a role2.
   • The cost of providing additional services, such as rental cars while your vehicle is being repaired, has also risen.
     
     

     Why Replacement Cost (Vehicle Value) Goes Down
     
     

   • The replacement cost of a vehicle is typically based on its current market value, which decreases over time due to depreciation. As a car ages, it loses value, so the payout you would receive after a total loss is lower each year.
     
     

Summary Table

Conclusion

While the market value of your car (replacement cost) steadily declines due to depreciation, insurance premiums can still rise because the costs insurers face—especially for repairs, parts, and claims—are increasing faster than your car is losing value. This means that even as your car becomes less expensive to replace, the overall risk and cost of insuring it may go up, resulting in higher premiums.