Insurance premiums explained

  • Insurance premiums are influenced by a wide variety of factors that extend far beyond claims trends and the risks themselves
  • Zurich Municipal is committed to helping customers understand what makes up their insurance premiums and why they can change
  • There is much customers can do in response to these factors in order to manage their impact on insurance costs

Insurance constitutes an important overhead for most public and voluntary organisations. But what makes up your insurance premiums, what factors are continuously influencing them, and how can you manage their impact on your insurance costs?

Insurance is a means of transferring the wholly unpredictable cost of future losses, and replacing it with a much smaller and certain cost – an insurance premium.

Insurers achieve this through the creation of a ‘common pool’, which is the principle by which the losses of the few are met by the contributions of the many. So, instead of organisations holding vast financial reserves to protect against future losses, each member contributes a small amount to the common pool.

The amount each member pays is predominantly based on the specific risks they face, and their individual claims experience. However, a number of other factors also influence what is needed from each member to pay for future claims.

Claims trends

As the frequency and severity of claims varies, so too does the amount needed to pay them.

Claims trends therefore considerably influence insurers’ pricing models.

The cost of settling claims has been steadily increasing for many years, across all types of insurance. From the rising cost of materials and labour, to changes in the ways courts are ordering claims be paid, numerous factors are causing this upward trend.

Alongside this has been an increase in the frequency of claims themselves. For example, motor insurers are now receiving around 1,500 claims per day for ‘whiplash’, with motor injury claims now totalling £2billion per year. In the current economic environment, fraudulent liability claims have also risen, with these types of claims now leading the market in terms of cost. A more litigious culture is contributing to all of these trends, and severe weather events have begun to represent a disproportionate percentage of claims received.

Social and economic influencers

We are still emerging from a global recession, and austerity measures continue to put a strain on resources. Theft, arson and malicious damage are all known to escalate as a consequence of financial pressures, and a growth in social unrest is predicted to continue. Insurance fraud has also risen, now reportedly costing the industry more than £2billion a year.

With reduced budgets and more competitive pressure, many organisations’ claims experiences are deteriorating, as fewer funds are available for risk management activities. Cutbacks to spending on maintenance and health and safety activities are particularly problematic, manifesting themselves in more frequent and costly property and liability claims.

Legislation and regulation

Changes to our legal and regulatory framework puts a constant pressure on insurance premiums, often putting additional responsibilities on people and organisations, as well as fundamentally changing processes and procedures. This can often influence new ways that claims can be brought, amounts that can be awarded, and the associated costs of administering claims.

Legislation can also present potential opportunities to reduce the costs faced by insurers, such as the recent Ministry of Justice reforms that include provisions to address increasing legal costs. Zurich Municipal is constantly monitoring these changes, and considering the impact of all legislation within its pricing.

Changes to insurance as a business

Insurance companies used to be able to make sufficient investment returns on funds they held, meaning they could often afford to make a loss on insurance activity itself. In the wake of the global recession, interest rates reached record lows, which significantly reduced the industry’s ability to continue with this business model.

To ensure insurance companies continue to meet liabilities to their policyholders, new regulatory requirements have been introduced that focus on the need to make a profit from the underwriting of insurance policies themselves. In the current environment, rates have needed to change to achieve this.

The importance of an insurer’s stability should not be underestimated, and Zurich Municipal is proud of its financial rating and confident of its ability to meet customers’ future claims. The financial strength of an insurer should always be a consideration when deciding where to place your business.

What can you do to mitigate the effects?

Although these factors may seem out of any individual organisation’s control, there is much that customers can do to manage the impact and effect they can have on insurance costs.

Zurich Municipal’s guide, Factors Influencing Insurance Premiums, takes an in-depth look at this topic and includes specific guidance on actions you can take.