What impacts insurance premiums?
At RSA we always aim to keep customer premiums as low as possible. But there are many factors that contribute towards the cost of insurance – some general to all policies, and others impacting only specific product types. Here we take a look at some of the factors and industry trends (over and above operating costs) that are impacting premiums.
Insurance Premium Tax
With the government levy on insurance policies rising to 12% this year, IPT now makes up a significant part of the cost of a policy. It applies to almost all personal insurance products, except Life Insurance.
You may be well-versed in FloodRe, the government re-insurance scheme for homes. Re-insurance is insurance for insurance companies, to protect themselves against catastrophic loss, for example after extreme weather events.
It goes without saying that a large proportion of a premium is to cover claim costs. But there are always market factors to take into account which determine the costs associated with claims.
For example, in the motor industry, Brexit has had a significant impact on the cost of car parts. The reduced value of the pound means sourcing parts from abroad has become expensive. Modern cars can now also much harder to repair, with so much more tech to navigate and replace.
In the pet healthcare industry, improvements in technology mean better treatment for pets – but an increase in the cost of vet treatments. And in the home insurance world, severe weather events (or surge events, that affect many people) mean that widespread damage caused by flooding or storms can have a huge impact on the cost of claims.
Escape of water
Repairing the damage caused by tracing and accessing leaks, particularly in flats, presents a huge cost to home insurers.
The Ogden rate determines how much insurers can reduce payments to personal injury claimants based on what they’d raise by investing that amount. This year the discount was changed from 2.5% to minus 0.75%, meaning insurers are currently paying out more than the agreed settlement amount, rather than reducing it. This has had a big impact on car insurance prices.
The Financial Services Compensation Scheme is the UK’s statutory fund for customers of financial services firms. It’s there as a last resort, for example for customers who’ve been hit by an uninsured driver, but all insurance companies must contribute to the fund.
There are always variable costs associated with writing an insurance policy – such as producing the policy documentation. As companies move towards creating a better online user experience for their customers there are costs associated with these kinds of service improvements.
Brokers and partners who underwrite their business with an insurance company earn commission for doing so. This is another contributor to the cost of the policy.
Return on capital
This is the cost of holding capital to underwrite policies. This is linked to a whole host of financial factors, such as interest rates and the percentage of customers that pay for their premium monthly or annually.