Insurance prices are jumping more and more every year and insurance companies always give the same reason – they’re doing it tough just like us.
But after reading a recent press release from the AA which revealed the extent of the rises for the cheapest home and motor premiums, News Insurances decided to find out why.
The companies implementing the rises all credit them to the same thing – economic troubles, more frequent catastrophes and an increase in claims putting a strain on profitability. But looking at the most recent results available online this didn’t immediately seem the case.
While the AA couldn’t tell News Insurances what the specific companies they used to compile their findings were, Ian Crowder, Public Relations Manager at the AA, told us that “all of the big names were there, including some of the smaller players too”.
So I decided to take a look at the books of some of the ‘big names’ in the insurance industry and see just how tough they are doing it.
Aviva’s latest published results are from the six months to June 2011. In this period, the company’s total operating profit jumped by 5 per cent to £1,337 million. The companies operating profits in Europe jumped 21 per cent “despite financial and economic difficulties in the eurozone.”
AXA’s results from the same period showed a similar story with revenues of £2 billion, an increase of 4 per cent.
These jumps in profits were in the same year that shoparound insurance prices (the average of the three cheapest policies available) went up by 5.4 per cent for motor insurance, 9.5 per cent for building and 11.2 for contents.
So if the companies are doing so well, what is driving the increases?
Crowder told News Insurances that, of the enormous profits the big companies make, the premium they charge only accounts for a very small per cent of this because when claims expenses are subtracted these profits don’t add up to much at all.
“Many insurers like Axa and Aviva do an awful lot more than just car insurance. So their books of motor business have been supported by other aspects of their business.
“In 2010, for every £100 taken in premiums insurers were paying out £123 in claims. Last year that had reduced to £116.”
This is particularly true more recently in the UK.
“Today with the UK’s claims culture people tend to make claims almost automatically for very minor injuries such as whiplash.
“That makes it hard for insurers to keep premiums down”
Claims rates have been so high in the UK recently, that it has been “many years since the motor insurance sector has shown an underwriting profit” at all. The money mainly comes from investments and the sale of other services, Crowder said.
He continued that the reason the shoparound index saw the biggest rises was because of the niche market they target.
“Companies decide to target a smaller market, such as younger drivers, then they realise that there isn’t as much profit there as expected.”
“It’s a bit like an oil company. They see a possible place for a mine, investigate it a bit and decide how much money to invest. But once they drill down it’s not certain how much oil they will find so there is always this risk of not making a profit.
“Similarly a company targeting a niche market, such as young drivers, has to decide whether it is worth the risk to do so.
“If it is worth the risk that’s all well and good but if not we often see premiums rise.”
Another reason is that “no company wants to have the cheapest cover.”
So despite the insurance giants making profits up to 10 figures long, we are not being robbed on the premium front. Premiums, when you subtract the cost of claims, actually account for only a small per cent of an insurers profits, so the recent rises therefor reflect real life factors.