How Car Insurance Companies Make Money
Car insurance companies earn money from a variety of sources, the largest of which is core underwriting activities. But how can some companies offer quotes so much cheaper than others? We’ll look at how car insurance companies make money in this article.
It’s also important to remember that, just as car insurance companies earn money differently, they also spend it differently. This can be seen when looking at the top 10 cheapest car insurance companies, as ranked by NimbleFins. It’s clear to see that some companies can offer cheaper quotes because they cut costs in areas such as customer service, for instance, by operating online-only customer service (that is, they don’t have telephone call centres).
While this can be beneficial in terms of cheaper quotes for customers, it does mean that customer service operates differently than many people expect. Cost-cutting aside, let’s look at how car insurance companies become profitable.
Car insurance companies primarily make money from their core underwriting services. They also earn premiums associated with selling add-on features, fees charged when customers make a change or cancel their policy, or interest charges when customers opt to pay in monthly instalments.
Core underwriting services refer to the premiums that car insurance companies earn for selling basic car insurance. For example, social, domestic & pleasure car insurance in one of three tiers of cover: Third Party Only (TPO), Third Party, Fire and Theft (TPFT) and Comprehensive. Core underwriting services account for around 86% of a car insurance company’s revenues, on average. However, companies typically pay out more in claims and for business running expenses than they earn in core underwriting. That means that car insurance companies need to earn additional revenue from other sources to be profitable.
These other sources include add-on extras, fees, premium finance, investments and more.
Add-ons income is earned when customers buy optional extras like breakdown cover, legal expenses, personal accident cover, key cover and courtesy car cover. Money earned by selling add-on features contributes around 3.5% of a typical car insurance company’s revenues.
Cancellation fees can reach £50 or more; black box policies tend to have particularly high cancellation charges. Car insurance companies sometimes charge other fees as well, such as for a change in address or vehicle or if there’s a missed payment. While customers often feel that administrative charges are high, they account for less than 1% of car insurance company revenues on average.
Monthly instalments are profitable for car insurance companies because customers pay interest charges each month for the right to pay monthly instead of annually. This is referred to as premium finance. While some top car insurance companies don’t charge extra for monthly payments, most do. And APRs can frequently be more than 20%, adding nicely to overall profits (contributing around 3% of total revenues). With this in mind, paying annually instead of monthly is a solid way to save money on car insurance, if it’s possible financially for a motorist. Investment income is the second-largest source of income for most car insurance companies, accounting for nearly 5% of revenues.
Additionally, car insurance companies earn money from investments. They take money earned from premiums and other sources of revenue and invest these funds until they are needed to pay claims out or for other business expenses. This provides nearly a third of the typical car insurer’s non-core underwriting revenues.
Finally, car insurers also earn money by profit-sharing arrangements with intermediaries. This could include, for example, monies earned for referring a customer with a damaged car to a specific body repair shop.
How do car insurance brokers make money?
Car insurance brokers make money from earning commissions on car insurance sales. These may be calculated as a percentage of the premium. As a result, buying directly from an insurer can be cheaper as there is no commission when the middleman is removed. Car insurance companies don’t charge commissions when working directly with customers.
Car insurance brokers also make money by charging admin fees. These can occur when a customer sets up, cancels, or renews a policy, or even if the customer makes a change to their policy like an address, vehicle or additional driver amendment.
Are car insurance companies profitable?
Yes, car insurance companies are profitable. However, to stay profitable, they must sell add-on extra features, charge for monthly instalments, and charge additional fees (e.g., cancellation). Car insurance underwriting on its own is not sufficient to make a car insurer profitable.
How much profit do car insurance companies make?
Car insurance company profits vary from firm to firm, but the average profit for UK car insurance companies is typically around 16%, according to data from car insurance specialist NimbleFins.