“Too cheap? TOO CHEAP?! My premium has gone up YET AGAIN despite having no claims last year!!”
Working in the insurance industry isn’t all fun and games, and explaining to customers why their premiums have increased at renewal despite them having an additional year of no claims bonus is always difficult.
As an insurance broker, we do not set the premiums ourselves – we simply broker an arrangement between a customer and an insurance underwriter using our experience and knowledge of the market to find you the most suitable cover at the most competitive price. So now you’re probably thinking underwriters are the bad guys, setting high premiums to take advantage of helpless motorists who have no choice but to cough up for the mandatory cover right? Well, not quite. Let us look at what happens when insurance premiums are too low.
There are two distinctly different types of insurance underwriters; rated insurers and unrated insurers, and the long and short of it is this:
- Rated insurers are financially stable and unlikely to go into liquidation, but as a result they charge more for their insurance premiums.
- Unrated insurers are not financially stable and are more likely to go into liquidation, often because they charge too little for their insurance premiums, but obviously, this means they are cheaper.
According to the ABI (Association of British Insurers) the total amount paid out last year alone on motoring claims was £8,100,000,000 (that’s right £8.1 BILLION) with the average claim now costing an all time high of £2,936. The insurance companies who pay for these claims generate income from collecting insurance premiums from their customers, and when they don’t collect enough premiums to cover the cost of the claims… well, I’m sure you can gather what happens next.
Naturally, insurance premiums can increase in spite of whether or not you have had a claim during the last year, and no, it doesn’t mean the insurance company is taking advantage of you; it simply means they are protecting themselves (and their customers by extension) and ensuring they remain financially stable and solvent. As a customer, you can choose to always go for the cheapest quote and disregard all other factors, but be aware that sometimes this comes with a heavy cost, namely if the underwriter goes into liquidation as thousands of more policyholders learned recently.
Alpha Underwriting, an unrated Danish insurer went into bankruptcy on Tuesday May 8th leaving over ten thousand customers without insurance, and without a refund to fund the cost of arranging replacement cover either. Alpha had been reinsured (protected) by another firm ‘CBL Insurance Limited’, however, due to claim reserves in relation to the French housing market, CBL saw their long-term issuer credit rating slashed from “B+++” to “under regulatory supervision” prompting interim liquidation of the company. Without CBL’s financial backing, Alpha ceased trading. This is a prime example of the volatility of the insurance market, and an insight into the benefit of using a broker who can help avoid such pitfalls. Connect Insurance did not use Alpha for any of our customers, and accordingly, none of our clients were affected.
Back in 2016 a similar situation emerged with Gibraltar-based unrated insurer Enterprise who also went into liquidation leaving a projected 75,000 policyholders without insurance. Thankfully these situations are uncommon, but when they do occur the results can be catastrophic for innocent customers who are left out of cover, and out of pocket, sometimes losing reputation, business and even their livelihood.
“THEY ARE SO CHEAP THOUGH!”
Indeed they can be, however dealing with unrated insurers brings other issues too, aside from the risk of bankruptcy or failure on their end. Unrated insurers are typically from continental Europe, and as such they are not held to the same levels of solvency testing or regulations as UK based ‘rated insurers’ are. They tend to be more difficult and expensive to contact due to the international aspect, and also the handling of claims (which is the whole point of having insurance) is often very long-winded and difficult to navigate with an overseas company. Whilst a claim is being investigated and handled, it is not uncommon to be left without any financial compensation and in some cases without a replacement vehicle meaning that if you rely on your vehicle for work, you will need to make alternate arrangements until the claim is resolved. In the event the company goes bankrupt with your claim still outstanding, it can become very tricky to arrange alternate cover and to secure compensation.
When you see an insurance premium that is unbelievably cheap, ask yourself why. In the same way that if you saw an item of food discounted by 50% you would assume there was something questionable about it’s quality, chances are if an insurance premium is a boatload cheaper than everyone else, there is likely a reason (and the reason isn’t ‘because everyone else is a ripoff’). It is simply market inflation, and just like the cost of everything else goes up, the cost of insurance goes up too.
Do you always go straight for the cheapest quote regardless? Has your insurance gone up this renewal? Do your insurance company keep you advised of factors that affect your premium? Be sure to head over to social media and let us know @connect_insure on Twitter and @cibltd on Facebook.