You’d expect your insurance premiums would stay the same, if not decrease if you’ve continually improved your risk management over a long period in business and made no claims.
Despite that apparent logic, insurance premiums across the board keep rising. This article explains how insurers work out your premium.
In short, the dollar value of claims is increasing faster than premium growth and insurers’ investments. That means insurance companies’ capital is taking a hit unless they increase premiums. Minimum capital requirements are needed to ensure you have protection and your (future) claim is paid.
The Australian Prudential Regulatory Authority (APRA) shows the gross claims expense for general insurance in the year to the end of June 2020 was 13% higher than the previous year. As well, their insurers’ investment income dropped 60.3%, leading to the insurance industry’s significant 70.5% after-tax loss.
APRA says factors outside insurers’ control have had an impact. They include natural and human-made disasters including mega bushfires, floods, and the pandemic-induced shutdowns that’s included state border closures. The Insurance Journal estimates insured losses for Australian bushfires in 2019-20 reached $1.9 billion.
How premiums are calculated
To work out your premium, an insurance company bases it on their claims’ cost, expenses and profit margin. According to the Insurance Council of Australia, your premium reflects:
- How likely that you’ll make a claim – this could be based on your claims history
- Your level of risk and how you manage it. It includes your past business experience and performance, risk-reduction moves you’ve made (installing an alarm system, etc.)
- The geographical location of your business premises. The insurance company will factor in the area’s risk profile
- The value of your business – its assets and turnover
- Taxes and inflation (the latter hit 2.2% over the year to March 2020, but is expected to drop due to COVID-19)
- The dollar-value level of coverage and your excess
- Regional or global changes affecting the price and availability of reinsurance
- The insurance company’s business costs, its investment returns, the number and size of its existing claims, and
- Any loyalty or bulk policy discounts your broker or advisor has tapped into on your behalf.
That’s a lot of data for insurance companies to compute, so how do they crunch it?
Deep dive into the data
Many insurers use complex data-analysis tools, including artificial intelligence, to help access quality information in real-time. That allows them to predict individual risk characteristics more accurately and precisely price your premium, says the Actuaries Institute. Insurers are also working with much more rigid underwriting guidelines and realising some risks are uninsurable.
A result of that is a wider range of premiums. For instance, premiums for Australian company directors and finance professionals alone have risen by more than 20% for seven straight quarters – that’s the fastest rise on the globe, says The Australian Financial Review. It revealed premiums had been “too cheap for the risk environment”. They’re playing catch up as the gap grows between the size of class-action claims and how much insurance cover is being taken out.
Meanwhile, in areas of Australia with the highest risk of natural catastrophes, building and contents insurance premiums are almost three times greater than other parts of the country.
Fluctuating building materials and equipment costs
For those looking to rebuild, construction costs rose one per cent in the first quarter of this year, according to the Cordell Housing Price Index. We can help you check your business sum insured value which differs from your real estate value.
Business spending on new equipment, plant and machinery was down nearly 14% in the year to June 2020, says the Australian Bureau of Statistics. But older equipment may have fewer safety features (therefore can be riskier) and could mean your staff aren’t as productive or efficient as they would be with newer gear. Balance that, too, with the fact that new equipment and plant will be more expensive, so more costly to insure because of the repair/replacement costs. And if you’re buying equipment from overseas, factor in movements in foreign exchange, too.
So, there is a logic to working out your premium rises. As your broker/advisor, we can guide you to manage your premium yet maintain the right level of risk protection.