One of the most important factors when it comes to car insurance is the price. But over the past few years, prices in the car insurance industry have been rising, leaving drivers wondering why.
We know that high insurance premiums can be frustrating, but it’s important to understand why. What most drivers don’t realise is that whilst they might pay thousands in car insurance without ever making a claim, that money doesn’t just line insurers’ pockets. Instead, everyone shares in the losses of a few. So you might not claim any of the money you paid in, but that money goes to cover other accidents.
Usually, the amount of money claimed is more than the amount of money paid in, meaning that the insurance industry regularly makes a loss. In fact, 2017 saw the industry make a profit for the first time since 1994.
Why is car insurance so expensive?
So if the car insurance industry is making minimal, if any, profit, but you are still paying a lot for your policy, where is the extra money going? This can vary from insurer to insurer, but here are some of the most common reasons…
Too many parties are involved
Normally, when you buy insurance, there are quite a few people behind the scenes. Between the customer, who buys an insurance policy, and the underwriter, who pays out for claims, there are several other links in the chain. The process usually goes something like this:
customer → price comparison website → software house → insurance broker → underwriter
At every stage, there is a cost, and the customer ends up footing the bill. At Cuvva, we have simplified the process by removing some stages, so that it goes:
customer → Cuvva → underwriter
Fraud drives up prices
Fraudulent claims are a big issue within the car insurance industry, and when it comes to temporary car insurance, the risk of fraud is even higher. Fraudulent personal injury claims like whiplash are one example of this. Since whiplash has no physical symptoms, these claims are almost impossible to disprove.
It’s thought that whiplash claims add £90 a year to the average insurance policy, and though many of the claims will be real, it’s the huge number of false claims that have driven up the costs.
The good news is that the law has now been changed, making it easier for insurance companies to challenge suspicious claims. The number of fraudulent claims made may decrease as a result, and hopefully the cost of premiums will follow.
Additionally, Cuvva are able to reduce the risk of car insurance Fraud by employing a series of services and solutions, such as asking our customers to provide vehicle and verification photos.
Insured drivers pay for the uninsured
Despite the fact that they’re breaking the law, a surprising amount of people drive without insurance. In fact, it’s estimated that more than one million drivers in the UK are uninsured.
When uninsured drivers get into accidents, the insurers of drivers who are insured have to cover the costs. It’s thought that around 27,000 people are injured in collisions with uninsured drivers each year, so it’s no surprise that the cost of these claims quickly stack up. The average driver has to pay around £30 more in their annual policy to account for uninsured drivers.
By offering flexible temporary car insurance options beginning at just one hour, Cuvva are making car insurance more accessible for drivers. Whilst this isn’t the only reason why people drive uninsured, as the rest of the industry follows suit and begins to offer insurance tailored to customer needs, this should mean less uninsured drivers on the road.
Why has my car insurance increased for no reason?
Those reasons explain why car insurance is generally expensive, but don’t account for why the price of your annual policy may have suddenly increased. Here are a few possible reasons why…
Rising insurance premium tax (IPT)
When it comes to insurance, VAT is not applicable. Instead there is IPT, which is added to every insurance policy you buy. Like VAT, IPT is set by the government. Also like VAT, IPT has been steadily creeping up in recent years, doubling from 6% in 2011 to 12% in June 2017. Unfortunately, it is thought IPT will continue to increase, and as a result, so will the price of insurance policies.
Changing Ogden discount rate
Put simply, the Ogden discount rate is an important part of the mathematical formula used to calculate insurance compensation for life-changing injuries. It’s designed to cover costs like loss of earnings and care. In 2017, the rate changed from 2.5% to -0.75%, making payouts much larger.
Due to the size of these claims, the amount of money insurers have to pay out has increased. Again, the customers are the ones who have to cover this cost, so premiums may have increased accordingly in the past 12 months.
Misleading temporary discount rates
Unbeknown to most customers, many insurers initially offer unsustainably low prices for annual policies to draw in customers, making a loss. When it comes time for renewal, they hike up the prices to make up for this loss in the hope that customers will just continue with the same provider. This means the price you are charged is likely to increase over time, regardless of whether you have had an accident or made a claim.
Unlike other insurers, Cuvva does not use this pricing model — any fluctuations in the price you pay for insurance with Cuvva are due to consistent rating factors such as your location and time of day.
The rise of temporary car insurance
Since the cost of annual car insurance has been on the rise and car ownership has been on the decline, car sharing has become a popular option. Cuvva created by the hour, temporary car insurance that offers infrequent drivers an affordable alternative so they can only pay for what they need.