Car insurance companies earn money in the form of premiums for core underwriting services, selling add-ons, investing income and providing premium finance; and in return they pay out money to policyholders for valid claims.
On average, car insurance companies earn a profit margin of around 16% (read more at NimbleFins here).
The profit margin is basically calculated as (revenues – costs)/revenues. So, for example, for every £400 car insurance policy sold by an insurer that earns an average profit margin of 16%, the company would have £336 of costs and make a profit of £64.
In reality, however, most individual car insurance policies are more profitable and some are money losing. It depends on whether or not a claim is brought. These policies average out to a profit margin of 16% across the industry.
For cheaper car insurance brands to earn a competitive margin, they need to cut costs – for instance by moving all customer service interactions to an online-only format, doing away with a customer service call centre.
Car insurance companies earn money primarily through insurance premiums (underwriting), investment, selling add-ons, fees & charges (e.g., admin or cancellation fees) and premium finance charges.
Insurance premiums reflect money earned from selling car insurance policies – these are the core revenues earned by a car insurance company. In most years, the core underwriting activities are loss making for car insurance companies. To stay in business, therefore, car insurers must earn money elsewhere.
To boost product revenues, car insurers sell add-on features which are additional coverages like breakdown, personal accident, and legal cover. In many cases, an insurer may offer more than one tier of cover, with lower tiers offering fewer features. While premium policies might include these as standard for a higher core underwriting premium, add-ons are often sold for an additional premium to boost the features of bare-bones policies.
Fees and charges are earned by car insurance companies when customers make a change to their policy (e.g., changing their vehicle when they buy a new one), move house or cancel a policy early. Some insurers with sophisticated online customer portals allow some changes to be made without a fee, or a smaller fee.
Premium finance refers to the fees or interest charges earned when lending money to policyholders so they can pay in monthly instalments instead of upfront. Allowing customers to pay monthly typically involves a finance charge, just as borrowing money from a credit card or bank would.
Car insurance companies need information about both the driver and about the vehicle. For the driver, they’ll want to know age, address, years of driving experience, type of driving licence, driving licence number, relationship status, accident history, claims history, occupation, no claims history, and more.
For the car, they’ll want to know the registration plate, make and model, year built, engine size, details of any modifications, security features, where the car is stored at night and during the day, and expected annual mileage, among other factors.
To stay profitable, car insurance companies must price policies according to the risk presented and the potential pay out. Insurers use all of these details about the driver and the vehicle to help them price a policy accurately.
Insurance companies ask for the value of a car in order to determine how much risk they’re taking on. Cars that are more valuable will cost more to repair or replace if they’re damaged in an accident or stolen. All else equal, cars will a higher price also cost more to insure.
Therefore, the value of your car is a factor in determining the premium you should pay. Car value is one of many factors used by an insurer to calculate a price.
Entering your driving licence number can save you time and ensure a more accurate, and possibly lower, quote.
If you don’t enter your driving licence number you’ll need to enter details such as your address and driving history in a quote form each time you want to generate car insurance quotes. Instead, you can enter your driving licence when filling out a quote form. By doing so, car insurance companies can pull up and check all of your details automatically.
This service is called MyLicence. The MyLicence service is run by the Driver and Vehicle Licensing Agency (DVLA) and the Motor Insurers’ Bureau (MIB).
An added benefit of entering your driving licence is that it helps to avoid errors when manually entering details of motoring convictions, which could lead to your insurance being invalidated. In addition, car insurers who are able to confirm your driving record may be more likely to offer you a cheaper car insurance quote, saving you money.
