If you want to go directly to another section of our guide to car insurance, you can click on one of the links below:

Part 1 - Car insurance explained
Part 3 - Liability and legal requirements
Part 4 - Car insurance jargon buster
Part 5 - Why car insurance costs so much
Part 6 - Optional extras
Part 7 - Cutting the cost of your car insurance
Part 8 - Shopping around for the best car insurance quote

We all know car insurance is an expensive business – but where does our money go? One factor rarely considered when making a claim is how your car insurance premium is used – but we at moneysupermarket.com believe this information will help you choose your cover wisely and make a more informed choice on the cover you opt for.

Where does the money go?

The money you pay on your car insurance is not merely set aside in case you need it – instead it is put into one big pot. Here’s a breakdown of where the money from your premium goes:

· 50% for claims.
· 25% for legal and administrative costs.
· 25% for costs of running the company.

These numbers vary between insurers. Some are better than others at saving and on cutting their overheads.

Most of the money paid out on car insurance claims is paid on property damage. Collision damage makes up about 50% of an insurance company’s total expenditure. However, this is a relatively small amount when taken in context with medical expenses and personal injury claims because the most an insurance company will ever pay out is the ‘fair market value’ for your vehicle. That is why collision and comprehensive cover costs companies a lot of money.

Insurance companies also spend a lot of money processing and settling claims. There is little that can be done to avoid these expenses but in part six we examine excess charges and their benefits in cutting these costs.

Additionally, advertising, staff and commission payments further increase the costs of running an insurance company – the best way to avoid these costs is to buy online.

Now you know about where your money goes, move on to part three for details on legal requirements and making a claim.