13 October 2016

To most people, car insurance premiums feel like a heavy burden. We go through the year without making a claim and resenting the fact that we had to pay the insurance company and imagine them rubbing their hands together and counting their profits. But is this actually so?

The answer is actually no. Premiums are increasing to reduce the losses being made.

The United Arab Emirates (UAE) Insurance Authority recently published statistics for the years 2008 to 2014, and the data is a little shocking. In 2013 the UAE motor insurance “loss ratio” was 91 percent. That means, for every dirham insurers received in premiums, 91 fils was paid out in claims. After adding in the costs of commissions and administrative expenses, the car insurance industry made quite a substantial loss in 2013. 2014 was a little better but again car insurers would have been in the red. The impact of this can be clearly seen in Zurich Insurance’s decision to exit personal insurance in the Middle East and in AIG’s decision to massively scale back - the losses were simply not sustainable.

So how did we find ourselves in this loss-making environment and what can be done? Well, the impact of a large number of insurers is exacerbated by inefficient distribution - we have huge numbers of small brokers, many of whom will work with a small number of insurers. This makes distribution an expensive and administratively burdensome problem for insurers. This is where insurance aggregation sites come in - in addition to ease of doing business (for the insurer and the customer) they bring transparency to the market.

While some efforts can be applied to lowering the cost of claims, the key driver of the loss ratio will always be the premium charged. So insurers have had to raise prices to cover losses. This masks an underlying issue. In the UK, for example, insurers use up to 16 “rating factors” to assess the price. The insurer makes a very detailed calculation, based on various factors, to ensure that higher-risk customers are charged more and lower risk customers less.

By way of contrast, third-party-only insurance in the UAE often only covers a single rating factor - the number of cylinders in the car. Even for comprehensive insurers, most insurers don’t charge based on your claims history or how far you drive per year. This simplicity in pricing of course means that some drivers pay far more than they perhaps ought to - in effect what those drivers are doing is subsidising the others.

So what can be done about this? Pricing needs to become more sophisticated and more dynamic. One key example of this would be for insurers to start taking driving history into account. In most other markets an insurance premium reduces substantially if the driver can produce a No Claims Certificate (NCC) from the current insurer. Most insurers in the UAE do not offer such discounts as NCCs are not routinely produced by insurers. This would need to be an industry wide change - perhaps driven by the regulator or the Insurance Association.

Should the customer be worried? No. If you’ve a clean driving record then be sure to find an insurer that offers a discount for drivers without claims - and always demand an NCC from your insurer. Even if you don’t need it this year you might need it next year. If you’ve a more chequered driving history then you’re getting a pretty good deal - just remember you’re getting that good deal at the expense of your fellow consumers.

 Any opinions expressed here are the author’s own.

© Opinion 2016