There are many factors that can affect how insurance
premiums are calculated. The primary one being the risk profile in question,
whereas the rest is determined by a range of other influences.
To help you understand how insurance premiums are
calculated, we take a look at a number of key factors that affect how insurers
determine premiums.
Global politics and
economics – Political change and its economic consequences can have a
significant influence on individual insurance premiums. For example:
Brexit – which has already reduced the strength of the
pound, which in turn has affected the price of materials bought outside the UK.
For example, 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.
Insurance premium tax (IPT) - The UK Government has
announced increases toIPT over recent years, directly impacting the price of
insurance. While this tax iscollected by insurers, it passes straight to the
government.
Cost of doing
business – Insurers face the same sorts of changes to the cost of doing
business as their customers. For example:
Exchange rate fluctuations
Reductions in investment returns
Salary inflation
Energy 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 events
Future claim trends – Insurers must adjust premiums over time
to cover the cost of future claims.
Investment income - any 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.
The following are examples of specific factors that have
recently affected particular lines of insurance business:
Public/products’
liabilityThe rise in activity from claims management companies
following the introduction of regulatory restrictions to other, previously more
lucrative, lines of business such as motor.
High claims inflation for bodily injuries, particularly for
catastrophic losses
Property
Following 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 customers
Increase in number of unoccupied buildings, leading to rise
in metal thefts, arson and fly tipping
Catastrophic losses from extreme weather events
Motor
Currency fluctuations – the drop in the value of the pound
is increasing repair costs, as everything from parts to paint becomes more
expensive
Although 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 bumpers
Fraud – 70,000 dishonest motor claims were detected in 2015
Growth in periodic payment orders (PPOs) for personal injury
claims, increasing insurers’ long-term costs
Employers liability
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 illnesses
High claims inflation for bodily injuries and growth in PPOs
Impact of low interest rates on investment income
These range of factors make up some of the influencing
factors to insurance premiums, however, premiums are still always looked at on
an individual basis. If you would like to discuss with us further on how your
insurance premiums are calculated, please call us on 01789 766 888.