The AA & Admiral Car Insurance to Raise Premiums

NCD News: The AA & Admiral Car Insurance - 02.08.08

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The AA & Admiral Car Insurance to Raise Premiums: Premiums follow the general laws of economics. An insurer can charge high premiums, but fewer policyholders will ultimately opt to pay these rates - which will generate a fall in total revenues. On the other hand, insurers can charge lower rates. This will attract many more potential customers but, again, total revenues will be low because of the low rates. Most insurers try to find the hypothetical "optimum point" between these two extremes, though of course it's far easier said than done.

There is also a social and political element to insurance premiums. Most people have a vague notion of a "right" to insurance, and if it becomes unaffordable for certain segments of the population, there will be an inevitable political backlash. This is why many times when rates are raised, insurers plead that it is only because of increased claims costs. This is so people do not think they are pocketing "excessive" or "exploitative" profits.

Such was the course of the AA, which stated in a July press release that premiums were set to rise across the UK. It noted that car insurance premiums had risen 5.3% over the last 12 months, and a whopping 114% over the last 10 years. It laid the blame squarely on rises in claims, from personal injury to home to car to flooding, and predicted the current trend would continue.

Curiously enough, though, and at about the same time, Admiral also predicted rising claims in the United Kingdom in its July financial reports. There, it made scant mention of rising claims but instead dwelled at length on the fact that rising premiums would swell the company's coffers and allow it more expansion abroad.

The two different audiences that the reports address may give us some insight as to the real revenue/cost situation facing insurers: the AA release was for the general public, where it is claiming it and other insurers are essentially being "forced" to raise premiums. The Admiral report is for shareholders, and implies that those same premiums will line shareholder pockets.

Both reports may seem contradictory but are not. Rising claims across the country do cause a rise in premiums, but in any premium rise insurers are usually careful to build in at least a margin more to increase their profitability. In short, the premium increases go partially to offset rising claims and partially to increase insurer profits.

Should policyholders be concerned about rising premiums? Yes and no. The premium increases are averages, and affect some policyholder groups more than others. The AA, for instance, noted that the hardest-hit among insured drivers facing rising premiums would of course be the young.

There is also a realistic limit as to how far these premiums can rise. Reuters reports, for instance, that more and more Britons are taking mass transportation not only in response to rising petrol costs but also car insurance premiums. Those looking for affordable insurance should also keep in mind that there are many budget insurers who will go against the trend of rising premiums by competing through their own lower quotes. In a time of rising premiums, then, being a careful insurance buyer is more important than ever. Although the touted savings of hundreds of pounds by switching insurers may sound unrealistic, it does happen in a lot of cases. †