How Much Do Car Insurance Companies Make?

Car insurance companies are profitable, but are they earning too much? And where do their revenues come from? According to a recent analysis by NimbleFins, car insurance companies earn a profit margin of around 16% on average. That essentially means that for every £100 a car insurer earns, they make £25 of profits before taxes. £75 of every £100 would go towards claim pay outs, customer call centres, general business expenses, etc.

Policies on which a claim is made are frequently money-losing. If a claim pays out is more than the premium taken in for the year on a particular policy, then the insurance company loses money on that contract. Most policies make money for the insurance company, however.

While the average profit margin is 16%, this figure can vary quite a bit from one car insurance company to the next. Earned premiums and differences in operating expenses account for some of these differences. For example, a company that does away with a customer service call centre will have lower operating expenses than a company that pays for staff, technology and business premises to house the call centre.

General Accident is an example of a company that runs its customer service via online support as opposed to a call centre. (They do still have a call centre to deal with claims, however.)

How do car insurance companies make money?

Car insurance companies earn money primarily through insurance premiums earned for core underwriting activities, investments, 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. Insurance premiums are the core revenues earned by a car insurance company. However, in most years, the core underwriting activities lose money. That is, premiums earned are less than the amounts paid out in claims. To stay profitable, car insurers must earn money elsewhere.

Car insurance companies sell add-on features like breakdown, personal accident, and legal cover to increase revenues. An insurer may offer more than one tier of cover in many cases, with higher tiers including some of these features as standard. Add-ons are often sold for an additional premium to boost the features of lower-tier, bare-bones policies.

Admin fees are charged by car insurance companies when customers change their policy (e.g., changing their vehicle when they buy a new one), moving house, or cancelling a policy before the policy year is up. Some insurers with sophisticated online customer portals allow admin changes like these to be made for free or at a lower cost to the policyholder.

Premium finance refers to the fees or interest charges charged when policyholders opt to pay in monthly instalments instead of upfront on an annual basis. Allowing customers to pay monthly typically involves a finance charge, just like borrowing money from a credit card or bank.

What information do car insurance companies need?

Car insurance companies need information about both the driver and about the vehicle. For the driver, they’ll want to know the driver’s 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.

Car insurance companies must price policies according to the risk presented and the potential pay out to stay profitable. Insurers use all of these details about the driver and the vehicle to help them price a policy accurately.

Why do car insurance companies ask for a driving licence?

Entering a driving licence number when getting car insurance can save time and money by enabling insurers to offer a more accurate and well-informed 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 avoid errors when manually entering details of motoring convictions, leading to insurance being invalidated. In addition, car insurers who can confirm a motorist’s driving record at the time of calculating a quote may be more likely to offer them a cheaper car insurance quote, saving them money.

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