How Interest Rates Impact Insurance Costs: Explaining Rising Premium Prices To Your Clients
The latter part of 2017 is likely to see insurance brokers inundated with demands for explanation regarding price hikes across a wide variety of insurance products. Being able to explain the relevant issues in a succinct and clear fashion will be vital to retaining the trust – and custom – of your clients through into 2018.
Why has insurance gone up?
There are a number of factors that have caused insurance premiums to rise over the past year. See our article: “A Guide for Changes to Personal Injury Payouts” for details on how tax, whiplash reforms and changes to the discount rate have significantly affected the costs of pay outs for insurance companies.
Another major issue having an impact on insurance policy prices is the sustained low interest rate we are currently seeing in the UK.
Why do interest rates affect insurance?
Insurance companies make some of their money from the income that they receive from policy holder’s premiums. The hope is that the policy payments exceed the cost of any pay outs that need to be made in the event of a claim. However, most of their income is made from the returns from investing these policy payments. This allows them, at times, to offer insurance policies at a very low profit, or even at a loss. However, the current low interest rate has seen investment profits plummet. LV=, the UK’s largest mutual, indicated that car insurance is likely to rise in 2017. They declared a massive pre-tax profit reduction for the first half of 2016, falling nearly 98% from 49 million in 2015, to 1 million in the same period of 2016.[i] This type of drop is clearly not sustainable for insurance companies. Many companies have been attempting to become more efficient in the way that they process policies and claims, in order to avoid increasing prices too much. However, limits have been reached and this year has seen companies UK wide having to increase premiums.
Which policies are most affected?
The policies that will see the most dramatic rises are policies with long claims processes; such as car insurance, public liability insurance and employers’ liability insurance. This is because traditionally, insurance companies could afford to offer excellent rates on these products as they had the benefit of investing the premiums. These investment returns were a healthy revenue source, over and above the initial policy cost. Delays in pay-outs allowed money to accrue interest for long periods before being paid out. However, now that the investments are not generating as much income, the initial policy prices are having to rise accordingly, to make up for the loss. Car insurance and personal liability insurances may rise particularly dramatically, as on top of the low interest rates, insurance companies are also having to contend with changes to personal injury pay-outs.
Policies where claims are paid out relatively quickly, such as home contents insurance or travel insurance may not see such a high percentage price hike, as policy costs have not been so heavily dependent on large investment returns.
What can you do for your clients?
As a broker, you can continue - as always - to try to find clients the best prices available. However, it is unfortunately unavoidable that in most cases, this year’s prices will not be able to beat last year’s.
Ensure that you have staff available who are trained in customer services and who understand the factors described above. They will also need to be able to explain it in a straightforward way when necessary. A specialist recruitment agency such as Aston Charles will be able to discuss your requirements and find suitable candidates who have experience in the sector as well as an ability to communicate well with customers.
In instances where prices are rising a lot, you may wish to communicate with your policy holders ahead of renewal, explaining the reasons for the price increase and the steps that your company is taking to continue to pursue the best prices.
Can this be an opportunity?
While this may be a worrying time as an insurance broker, this is the ideal time to contact clients, suggesting that they combine insurance policies, allowing them to squeeze any possible deals out of insurance companies by having multiple policies. It is also a good time to review existing insurance policies, ensuring that that clients are insured accurately – not under or over insured. Revisit other key marketing areas at the same time; see our article “six key ways to establish brand loyalty in policy holders” for ideas. All this will allow your clients to see a competent and invested brokerage service, working hard to mitigate any potential price rises in every way possible, cementing your client’s confidence in your business.
[i] The Guardian. 2016. LV= car insurance premiums to rise as profits plummet | Business | The Guardian. [ONLINE] Available at: https://www.theguardian.com/business/2016/sep/19/lv-car-insurance-premiums-rise-profits-accident-payouts-interest-rates. [Accessed 23 August 2017].