While the cost of car insurance has dropped a bit due to the pandemic, it is still a source of anxiety and frustration for many car owners – especially when renewal prices go up for no apparent reason. Are car insurers taking advantage of motorists by overcharging? Actually, car insurance data shows insurers suffer losses from their main underwriting activities. Revenues from fees and charges are not the largest either. So how do car insurers make money?
Perhaps contrary to popular belief, insurance underwriting activities (86% of car insurers’ revenues) are generally not profitable. The Loss Ratio (i.e., claims/premium) for car insurers is 76%, which does mean car insurers pay less in claims than they take in premiums. However, once you factor in the expenses of running an insurance business (e.g., paying staff, operating a call centre, etc.), expenses and claim payouts become larger than the earnings from main underwriting premiums. From 2013 to 2018, primary motor insurance underwriting activities lost money in 5 out of 6 years.
This means that motor insurance companies rely on non-core sources of revenue like add-ons to stay in business. But the largest source of non-core revenues might be a surprise—it’s investments, not fees and charges. The investment portfolios of car insurers generate interest, dividends and capital gains. These returns typically account for 4.8% of total revenues, or 34% of non-core revenues.
Add-ons are another source of income for car insurers. According to the FCA’s General Insurance Pricing Practices Market Study, additional features sold as add-ons account for 25% of car insurers’ non-core revenue, on average. The largest share of add-on revenue comes from legal expenses (48%) followed by breakdown cover (22%) and courtesy car (11%). One in three (32%) motor insurance customers are sold at least one add on.
Other, smaller sources of income for car insurers include premium finance (monthly instead of annual payments), claims-related revenue, and lastly, fees and charges.