And how do we get the best price available?
As someone who works in the industry, I am fully aware of the stigma that is sometimes associated with insurance - mostly personal insurance policies, such as car, home or travel insurances. It is common place on social networks, chatrooms, forum sites, and in general chit chat amongst friends for the subject of insurance to arise at some point, whether this be related to price, a recommendation, or a complaint about a claim etc. I think we have all had our renewal come through and gasped at the increase...only to find your insurance company will reduce the price in alot of cases if you call them to complain about it...! So what are the reasons for this....?
The methods used to calculate insurance are complex, but i will attempt to briefly explain the mechanics behind the underwriting and the marketing practices used by insurance companies and brokers in the car insurance market today.
Ok, so essentially, insurance is a business like every other, they are designed to make a profit - lets assume for this exercise that an insurer does not earn any additional income other than that from insurance premiums alone, ie no investment returns, cross selling etc - this is classed as "underwriting profit".
Lets also assume that 100 people want to insure their car (they want to pass the risk of any financial loss associated with their car to another party) - all of them pay £200 for one year - the insurer collects £20,000 premium. Essentially, to make money, the insurer does not want admin costs, or the costs of claims to exceed £20,000 in one year. Lets say two of these people have a crash with a couple of other third parties and it is their fault - even minor incidents are likely to cost the insurer a considerable amount, but if the claims involved personal injuries, which many do these days, the costs of these claims may easily top £20,000 each.
Lets take the £20,000 each claim for this example, which means the insurer has paid out £40,000 - next year - the insurer is going to have to charge each person £400 and hope it doesnt have any claims (even then it will only have recouped the cost of last years claims and will break even).
It is worth noting at this point that the car insurance market as a whole has not made an underwriting profit for over ten years!! - this means that your car insurance is still too cheap! Whattt?? i hear you say.....that cant be true...!?
Unfortunately it is - insurers discount the true underwriting premium in order to gain market share, which is why you are always going to get a cheaper price when first joining a company - the company know they wont make money off the car insurance premium itself, but they will try to cross sell Breakdown, or Legal Expenses to make some money back. Then at renewal, you will find your price goes up to something more in line with what the insurer needs to charge to make money.
Ok, so now lets take a close look at what is going to happen to your car insurance premium over the next couple of years - claims costs are rising, costs of parts, solicitors fees, admin fees, all mean the average cost of a claim is always rising with inflation. In addition to this, there are more cars on the roads now than ever before, there are more cases of fraudulent claims, exagerrated claims, and uninsured drivers (uninsured drivers add around £25 to your insurance premium every year). Personal injury claims are more frequent, and the payouts higher....can you see where i am going with this....
Essentially, your car insurance will probably rise this year, by as much as 10-20% - and will possibly continue to do so next year - ultimately, the only thing that can be done to prevent future rises, are for drivers to be more careful on the roads.
However, individually, there are a few things you can do to keep the cost of your insurance down:
1. If you are Third Party Fire and Theft - get a quote for Comprehensive cover - these policies are sometimes cheaper
2. Try adding your Spouse to the policy - insurers give discounts for Insured and Spouse Drivers
3. Estimate at a lower mileage per annum - obviously if you are going to go over it you will be obliged to tell your insurer when you get close to the declared limit
4. Shop around at renewal - however, always be careful of excesses and cover offered - generally you get what you pay for - the same applies to an insurance policy
5. If you are prepared to pay a slightly higher voluntary excess, you will get a small discount off your premium, but have to pay more in the event of a claim
6. As the very last available option....get a smaller engined car!
