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The harsh realities of Insurance

 

 

It is a question we get asked a lot. “Why do I end up paying the same premium each year, sometimes more when I haven’t have an accident many years?”

It may seem somewhat maddening that you pay every year and yet do not claim. It may also be the case that when you check-in with many of your friends they are in exactly the same position. This will lead you to the obvious conclusion that insurance companies are making an absolute fortune in profit from those policies not claimed against. Sadly, like many things, the reality is a lot more complicated.

As much as we hear from policyholders constantly that they have never claimed against an insurance policy, it remains the case that insurers cannot tell who is going to have the accident that year. Over the long course of our history, we have seen it many times; those who’ve never had an accident sometimes after decades of driving, some have one closely followed in quick succession by a second. Like buses they always seem to come at once!

And that’s where the average cost of a claim in a modern claims environment increases overall premium. Premiums relative to claims cost on average are below 10%. That means if you have a frequency of 10% or more then the insurer loses out. And how often does this happen?

The answer is more frequently than you would think. As much as a 10% frequency sounds high, in reality depending on the class of business, most years the claims frequency is usually in excess of this.

What then drives the average cost per claim is a variety of factors that make setting premium levels fairly difficult. Unfortunately, despite Guernsey being a safe, prosperous environment with (for the most part!) Better drivers with less frequency of claims than seen in the UK, Guernsey is not viewed as an isolated market but rather falls within the more general view of the UK/European casualty market.

Reinsurer’s, who provide insurance for the primary insurers that provide the policies in the islands are themselves large international corporations who span the globe. Their view is of markets in geographic areas so for instance Guernsey would fall under the general provisions of Europe. This is because the market itself is too small to merit its own reinsurance program. Consequently, the cost of large claims, the most severe claims (which do occasionally befall Guernsey as well) get more expensive year-on-year. It remains the case that Guernsey is uniquely poorly viewed in this area given previous settlements, and most notably the well-publicised £14 million cyclist claim several years ago which places Guernsey on the reinsurer’s radar having potentially some of the most expensive severe claims, certainly in the UK and possibly Europe. What this means practically is that there is an awful lot of smaller premiums to pay for the loss of £14 million. You can effectively wipeout a motor insurance account for multiple years with one claim.

So whilst reinsurance is one expensive part of the claims cost, so is the general cost of reinsurance cover which is driven by a multitude of other factors; not least changes to the discount rate for severe claims, the low yield on investment monies traditionally relied upon by reinsurer’s and decreased competition from merger and acquisition activity.

Moving beyond reinsurance, there is also the cost of everyday claims, which rises year on year. Cost of car parts, especially with Brexit looming has arisen as the technology in cars has also increased. Inflation on parts is driving a consistent and sustained leap in the cost of vehicle park repairs. There is general inflation in the cost of repair work undertaken.

One of the things that remains to be seen is how the ongoing pandemic has affected the sourcing of parts for vehicle accidents. There has been significant pressure within the global supply chain and therefore we have yet to see what the availability of parts and the cost of them will be as the disruption is forecast to continue, potentially for years to come.

So unfortunately it is a case that the cost of policies is unlikely to fall in the near future. It is very much linked to the number of accidents for sure, but equally there are a number of pressure points that we’ve explored above that will always have an inflationary impact on claims and therefore the premiums paid by consumers.

The good news however is that our team, nominated as one of the final four in the UK claims handling ‘team of the year’ awards by two separate organisations, have a strict mandate to handle claims as efficiently as possible. You’re in good hands!

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