Why does your insurance premiums change?

The Trickle - down effect of insurance pricing

 

Insurance premiums are not direct reflections of the risks insure. While inflation is a good start for anticipating changes in your rate each year, there are still other, more subtle factors you may be unaware of that affect the cost of insurance.

 

 

Factors impacting reinsurance

 

So far 2015 has been a quiet year for catastrophes—below the recent 10-year and 15-year averages—which has boosted profits for reinsurance companies because they paid out fewer and cheaper claims. Additionally, innovative investment options have provided opportunities for reinsurance companies to generate new capital.

Having extra capital on hand means reinsurance companies can insure more people and businesses—raising the competition for customers. As a result, primary insurance companies are paying lower premiums for reinsurance, a savings they can pass along to consumers like you.

 

 

Underwriting profit

 

Insurers measure their underwriting profits with their combined ratios. A combined ratio is calculated by dividing the sum of incurred losses and operating expenses by premiums. If insurers have a combined ratio of less than 100 per cent, they are making a profit. A combined ratio of more than 100 per cent reflects a loss.
Initial reports summarising the first half of 2015 from UK insurers show that, on average, combined ratios continue to improve. A small number of catastrophic losses for the remainder of 2015, as well as new methods of synthesising and analysing consumer data, will likely lead to reports of improved combined ratios again in Q1 of 2016.

Investment Holding

Another way insurers make money is by investing policyholder surplus and cash reserves in the stock market as well as a variety of other investment vehicles. If investment returns are good, the insurer makes money.
Many UK insurers continue to report dwindling investment yields due to low interest rates, stemming from the United Kingdom’s sluggish but persistent economic growth since the 2008 financial crisis. In response, insurers are aiming to shift, grow and diversify their investment portfolios, reflected in the graph below.

 

 

Increasing interest rates 

Interest rates in the United Kingdom have been kept at historic lows since the aftermath of the financial crisis. But as economic recovery gains momentum, analysts are anticipating a rate hike sometime between the first half of 2016 and 2017. Rising interest rates are generally considered a sign of a strong economy, yet opinion remains varied on how rising interest rates will affect financial markets.



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