There are many factors that influence the calculation of premiums. Here, we hope to give you some insight into some of the key factors that affect how insurers determine premiums.
Politics and economics
Political change and its economic consequences can have a significant influence on individual insurance premiums.
One example is the current uncertainty over Britain’s exit from the EU, which has already reduced the strength of the pound. This is affecting, among other things, the cost of motor parts manufactured outside of the UK, which in turn increases the cost of repairing a vehicle and therefore the premiums needed to cover future motor claims.
Two other examples are the recent increases in insurance premium tax (IPT) and the reduction in the Ogden discount rate. The UK Government has announced a number of successive increases to IPT over recent years, directly impacting the amount customers pay for their insurance. While this tax is collected by insurers, it passes straight to the government.
The reduction in the Ogden rate, meanwhile, will have a significant impact on personal injury compensation awards and on injury claims reserves.
Cost of doing business
Insurance companies face the same sorts of changes to the cost of doing business as their customers. For example:Exchange rate fluctuationsReductions in investment returnsSalary inflationEnergy cost rises
Insurer business models
In addition to typical business outgoings, insurers’ business models also feature a number of unique factors that will influence insurance premiums. These include:Solvency requirements – Insurers are legally required to set aside a significant proportion of earned premiums to ensure there is always enough money to pay future claims. This includes large and catastrophic losses, such as extreme weather eventsFuture claims trends – Insurers must adjust premiums over time to cover the cost of future claims. If, for example, a type of workplace injury becomes prevalent, this is likely to affect future claims experiences due to the increasing trend of Periodic Payment Order (PPO) awards for serious personal injury claimsInvestment income – Many lines of business, such as Employers Liability (EL) and Public Liability (PL) have historically run at an underwriting loss, with insurers relying on investment income to generate an overall profit. Global interest rates have fallen significantly over recent years (the Bank of England base rate, for example, recently dropped to an all-time low of 0.25%), putting more pressure on insurers to make an underwriting profit, putting upward pressure on premiums
The following are examples of specific factors that have recently affected particular lines of insurance business:
Public/products’ liabilityRise in activity from claims management companies following the introduction of regulatory restrictions to other, previously more lucrative, lines of business such as motorHigh claims inflation for bodily injuries, particularly for catastrophic losses
PropertyFollowing the recession, many businesses were forced to cut back on risk management expenditure, leading to increased losses and larger claims. Property is also still commonly being underinsured, despite the significant risks this poses for customersIncrease in number of unoccupied buildings, leading to rise in metal thefts, arson and fly tippingCatastrophic losses from extreme weather events
MotorCurrency fluctuations – the drop in the value of the pound is increasing repair costs, as everything from parts to paint becomes more expensiveAlthough better technology in vehicles is reducing the number of collisions, this technology costs more to replace or repair if it is damaged, with much of it featuring in high impact areas such as bumpersFraud – 70,000 dishonest motor claims were detected in 2015Growth in periodic payment orders (PPOs) for personal injury claims, increasing insurers’ long-term costs, along with impact of Ogden rate reduction
Employers’ liability (EL)Latency – insurers must price for the fact that decades can pass between an employers’ liability policy being underwritten and a claim being made, e.g. for asbestos-related illnessesHigh claims inflation for bodily injuries and growth in PPOsImpact of low interest rates on investment income
Despite the importance of these factors in determining premium levels, we will always look at each customer on an individual basis, and try to limit the impact of factors outside of your control.