How insurers work out the cost of cover for their customers can be complicated because they look at a range of different factors to calculate risk. Plus, different insurers use different data.
The insurer needs to estimate risk so it can collect enough money to be able to pay out to those that need it. The premiums of the many cover the claims of the few.
We’re also in a period of high inflation. This means it's getting more expensive to fix that damaged bumper, replace items stolen in a burglary or to pay for a poorly pet’s surgery. So given the vast majority of your insurance premium goes to pay these claims, if costs go up then it’s likely premiums will need to rise accordingly.
Explore the broader systemic trends that could influence motor insurance premiums.
Having listened to questions from insurance customers we have tried to answer the most common queries below, as simply as possible.
Your insurance premium goes into a large pool that is drawn on as people make claims on their policies. The vast majority of this premium will go to another customer that has to make a claim, with the premiums of the many paying for the claims of the few. In very serious accidents, such claims can climb into the £ millions.
Here’s a reflection of how motor insurance premiums are used – showing the breakdown of all claims and costs incurred by insurers in 2021.
Click on each segment to learn more.
On top of what you pay in premiums, there is an additional 12% in insurance premium tax. You can read why we think this tax is an unfair levy on a responsible purchase.
Like all companies, insurers aim to make a profit so they can invest, grow and pay shareholders (or members in the case of mutual insurers). The average profit margin in motor insurance is fairly small (single digits %). Many insurers operate at a loss on motor cover to keep that customer, so they can offer customers other products like home, pet or travel insurance. Alternatively, an insurer can run at a loss on motor cover but recoup this through investment returns or policy add-ons.4 Last year (2022) many insurers ran at a loss, in terms of their motor insurance claims vs. premium income.
4. For more on insurer profitability see this report from the FCA (sections 3.33 to 3.47).