Why do insurance premiums keep increasing?

Unfortunately insurance premiums are on the rise, here are some reasons why…

Fraudulent claims

One of the most significant reasons for the increase of insurance premiums, is the frequency of fraudulent personal injury claims, with bodily injuries accounting for 37% of insurer costs. 🏃 These personal injury claims specifically relate to soft tissue injuries, for example whiplash. Fraudulent claims are a major issue in the industry, to such an extent that the ABI has calculated that insurance fraud adds £39 to the cost of every motor premium.

Discount rate

On 30th March 2017, the discount rate changed from 2.75% to -0.75%. The full effect of this change on insurance premium is covered in-depth by a previous blog post. However, to briefly summarize: premiums are increasing to cover costs caused by the new discount rate, but also to cover the losses on the policies written prior to the change.

Price comparison sites

An increase in insurance premium at the point of renewal can be explained through the role of price comparison sites. In order to be at the top of a price comparison website - to sell any reasonable number of policies - an insurer must provide a price around 1% lower than everyone else. Consequently, most policies are unprofitable in the first year, so when the time for renewal comes around, insurers will try to make back their losses for the next year. 🔁
It is important to note however, that this is the insurer trying to maintain some level of profitability, whereas the other elements covered in this blog, relate to the industry factors that lead to premium increases.

The process of advertising on price comparison sites is costly in itself. The process looks a little like this: connect to software houses > insurance brokers > connect to software houses > underwriters. Each stage of the process has a cost attached to it, so by the end of the funnel, only a small percent of the money that a company puts into the price comparison process, will lead to a conversion. To market insurance from a search engine, the comparison site will pay up to £15 per click to their website, then the insurer will pay the comparison site around £45 for each policy sold. 💷

Terrorist attacks

Given the saddening trend in vehicle-based terrorist attacks, European insurance companies are having to anticipate huge payouts for black swan events. These payouts are huge because they need to support the victims who have sustained injuries for the rest of their lives; in the UK, the NHS is not free for motor insurance accidents. As a result of the increase in vehicle-based attacks, re-insurers are now having to consider the implications on policy pricing - for now, it looks like this will be specific to vehicle hire policies.

Insurance premium tax

A final reason for the increase in insurance premiums, is the rise of insurance premium tax. To give an idea of how quickly the insurance premium tax has risen: when Cuvva started it was at 6% and now it is at 12%. This means it has doubled in 2 years, and is expected to continue increasing until it reaches 20% - the same as VAT! 😫

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