Depreciation represents a decrease in the value of property such as a car due to wear and tear, as well as other factors over a period of time. Depreciation is an important factor in car insurance as it influences the market value of the car at the time of a loss.

Most insurers use current market value when paying out claims. If you insured your car a year ago at market value, that value may be a lot less today. A report in 2007 revealed that some models of brand new cars reduced by 10% to as high as 40% within the first year of ownership. When buying a new car one of the considerations should be the average depreciation rate of the particular make and model.

Factors influencing the depreciation of cars are wear and tear, ageing, usage, mileage and economic conditions. A few years ago the prices of new cars dropped and that had an immediate effect on the value of second-hand cars as their value depreciated much faster than was previously the case.

Because of the effect of depreciation on the value of cars, one should review your insurance yearly and request the insurance company to reduce the value of the insured car accordingly.