How Stuff Works: Auto Insurance in Canada

Many people claim not to understand how car insurance works – and they are not that interested in learning about it. This is a pity, since insurance is actually a lot simpler than most people think it is. When you get down to the basics, insurance can be summed up as many people paying out money that is then used to pay for the losses of a few people. Every time you pay your premiums, the money goes into a large pot so to speak. The money from this pot is used to pay back people who have been involved in car accidents or other things covered by their insurance. Since typically there are more people paying their premiums than receiving money, insurance companies are able to pay out benefits and still have enough money leftover to make a profit.

Insurance Companies Buy Insurance Too

However, if a really big disaster happens and a ton of people come clamouring for money all at once, the insurance company may not have enough money left in the pot to pay them all. This does not happen that often (if it did, it wouldn’t be worth it to run an insurance company for profit) but it has been known to happen occasionally. One such financial disaster almost occurred in 1998 when a massive ice storm hit Ontario, Quebec and New Brunswick at the same time, resulting in over 700,000 claims totalling around $1.4 billion. Just in case a really big disaster hits and empties the pot, insurance companies will purchase their own type of insurance called reinsurance. Some of the premiums you pay may be used to purchase this insurance.

Auto Insurance Policies Change Every Year

Unlike some life insurance policies where premiums build up over the years, car insurance policies are recalculated each year. Policies only cover one year at a time. Insurance companies arrive at their prices based on estimates of how much money they think they will need to pay the coming year’s claims.

The Contract is Key

Auto insurance will not cover every single possible thing that could go wrong with your car – it will only pay for the things specifically outlined within your contract. Exactly what your auto insurance will cover depends on which level of coverage you purchase. Your car insurance is not designed to be used constantly – it is there to cover unexpected major financial issues that are the result of sudden and accidental events.