Do the numbers add up?

When running an Insurance agency that operates on behalf of you - the Insurance purchaser - the topic of insurance companies over charging comes up almost on a daily basis. Whilst yes we 100% work on behalf of our clients in dealing with Insurance companies we have a strong relationship with these same companies to negotiate the best terms and conditions for you. So over the years we have gained a respect for how pricing of insurance works.

My first job in Insurance after leaving the media full time was with GIO. It was at the time that GIO were establishing the new inbound call centre for domestic sales. ie: Home, Car and Caravan Insurance. It was in Toowoomba and after making the decision to leave Radio I figured with 180 jobs available surely I could talk myself into one with GIO. I knew nothing about insurance, probably like much of the community, however very quickly grew an apreciaiton of the role it played within our lives. One of the 1st points we learned during orientation week was how an Insurance premium was formed. It's a very technical process usually made by Actuaries who are way smarter then us, but in it's essence it is also very simple to break down and understand why and how Insurance Companies charge what they do.

We'll use some very broad general examples to make it even easier. An Insurance premium 99% of the time is looked at by a consumer as a single figure. Say my Commodores Insurance this year is $1,000 total. Thats all we see right? $1,000 to cover my car. Wait for the outrage from Sensationalist media outlets!! What a rip off huh!! Well before stones are thrown think about what a $1,000 may be covering. 

My car is a 2013 SV6 Z Series Commodore. Present market Value of about $36,000. Keep that number in mind. Let's now break down the $1,000 we mentioned to show exactly what an Insurer may recieve in this instance. A premium is broken up into a number of comparments which we will outline below.

Base Premium = $857.22
Fire Service Levy = $8.57
GST = $86.58
Stamp Duty = $47.63
TOTAL = $1,000.00

So if you look at your Insurance invoice properly you will see that my Car has 3 levels of tax on it. A Fire Service Levy, The GST and Stamp Duty. The problem with taxes on insurances is that they are compounding. The GST is charged on the base premium and Fire Service Levy. The Stamp Duty is charged on the Base Premium, Fire Service Levy and GST. So in essence youare paying tax on a tax on a tax. Thats a whole other topic for a blog which we might dive into at some stage but if you do want to know how to join the push to curb tax on insurance go to the National Insurance Brokers Association (NIBA) webpage;

https://www.niba.com.au/html/38922.cfm

So aside from paying on my car $142.78 in taxes I am paying my Insurer only $857.22. Now go back to the current matrket value of my car. It it was smashed by a falling tree in yesterday wild storm and declared a 'write off' my insurer would pay the market value. In this example $36,000. So I've paid them $857.22  and they now have to pay me $36,000. Talking from a business point of view please tell me if your business could survive having to do this everyday.

Lets take it one step further, of that $857.22 that the insurer charges they need to pay normal business overheads. Rent, leases, wages, their own insurances, utilities, advertising.... the list goes on just like any other business. Take out the operating costs from my premium and they may have say $200 left over. So this $200 is all they put away to pay claims. Some insurers work off different operating costs so the amount they put away for a claim could be more. For example I worked for a commercial Insurer for 4 years who put away 50% of the premium for claims. Meaning if they still had to pay outgoings like the above example my $857.22 has now tipped into the red.

So how does an insurance company fill the gap if their operating costs and cash put away for claims is not covered by my premium? They invest heavily. Insurance companies have divisions whose only purchase to monitor and track their cash reserves. They move it around various sources of revenue to try and get higher returns then what a normal car insurance policy provides. It's a basic numbers game but with insurance the numbers never add up until a major catastrophe occurs. We've had about a dozen solid events over the past 4 that saw those cash reserves of the insurers drop to dramatic lows. Once they drop too far, they need to top them up again. Hence you may see premium increases. Again though with premium increses consider the earlier example. If an insurer makes a decision to increase all car premiums by 5% this is purely on the BASE premium. Once you add the compounding taxes this ammount can grow to 6% and upwards.

The Car is a small and easy to understand example but when we get into Business Insurance the premiums are higher and the taxes - depending on the state you are in - are substantially higher. With Fire Service Levies in the range of 30% at present it means that instead of around 15% in taxes on a car policy you may be paying over 47%. So a 5% insurer increase can have a harsh knock on effect.

Having spent time working for 2 of Australias largest Insurance companies I was exposed to the inner working of an insurance premium and seeing how skinny the margins are for insurers. Hence the need for investment and diversity. If an insurance company only insures people for one product in one area then a major storm can wipe out all cash reserves. By writing more products and selecting areas they spread their risk. End of the day as a consumer we probably dont put much into the financial burden Insurance Companies take to provide their service. Go back to my car; $857.22 in premium to an insurer to pay out potentially $36,000 is a total loss was to occur. Think how many years an insurance company needs to collect premium to cover that loss. Just shy of 42 years for one car.

Hope this rundown of how a premium is broken up is helpful. Yes it wont help the pain of an insurance bill one bit, but consider the points mentioned. Taxes play a major role in your premium and need to be reduced or even removed in full. The Insurance Company is way behind when it comes to collection of premium for the responsibility it takes on. Make sure you are purchasing a policy that covers your needs. Think about them and ensure your insurer covers the areas you are concerned about. Finally, talk to an independant broker or adviser. We dont work for Insurance Companies so are able to source cover to meet your needs through a number of companies. Also when a claim arises we are working for you to seek the maximum fair settlement. An Insurance Premium is only tested when a claim occurs. Generally if one insurer is so far cheaper then anyone else in the market then cross your fingers come claim time.