Despite car insurance being a legal requirement in the UK, it's often misunderstood. In particular, when it comes to pricing and how the cost of an individual policy is calculated. After all, some of us end up paying more for insurance than our cars are actually worth, which can't be right, can it?
If you purchased a car for just £600, but are expected to fork out a whopping £1300 for an insurance policy, it's easy to see why you might feel as thought you have been well and truly taken to the cleaners.
However, when you begin to delve into all the individual costs that contribute to the price we pay for car insurance it begins to make much more sense. With this in mind and using data that has been made available by the COOP, we have written a breakdown of how the money you pay is spent, and here it is.
Injuries Sustained By Others
At 24%, it probably comes as no surprise that the cost of injuries sustained by others i.e. the driver of a second vehicle or a passenger, is the second biggest factor contributing to the cost of a car insurance policy.
This is a cost that's pretty much unavoidable as given the nature of road traffic accidents, injuries are pretty much commonplace. As unfortunate as it might be, these injuries do range in severity greatly and therefore the cost of dealing with them does too. However, it's fair to say that a large part of this cost can be attributed to the no win, no fee, whiplash claim culture that has taken hold of the last five or so years.
Damage to Other Peoples Property
Damage to property such as other cars, but also personal belongings, buildings, fences and walls accounts for 18% of the cost of a policy. This might seem steep, but if you consider the fact that even a £300 Vauxhall Corsa has the ability to cause serious damage to other potentially more expensive cars or even property, it is perhaps a little more reasonable.
Damage to Your Car
21% of the cost of a policy is attributed to covering the cost of repairs to your car, following one of several possible scenarios. The first being, a road traffic accident, secondly to cover the cost of damage caused as a result of theft and thirdly the cost of damage as a result of a vehicle fire.
Of course, this cost isn't simply attributed to repairs, but also vehicle replacements. For example: if your car is damaged to such an extent that the cost of repairs would be close to the market value of the care, the insurance company would likely choose to write it off.
The Insurer's Operating Costs
Running a business of any kind is by no means a cheap affair, but running an insurance business takes things to a whole new level. For a start, there's all the legal and regulatory expenses and then the cost of market research, underwriters, administrators, sales and aftercare teams.
However, the list goes on and on. Adding to it further are the costs associated with running premises, paying business insurance and incorporation tax. All things considered, a whopping 26% of a policy cost is swallowed up on an insurer's operating costs.
Insurance Premium Tax
Yet another tax, I hear you say? Unfortunately, the reality is that every time you purchase an insurance policy, whether it is for a car or not, 9% of the cost is attributed to insurance premium tax.
However, it's worth baring in mind this percentage will change. In line with his march 2016 budget announcement, George Osborne has set in place a change that will see the rate of tax paid on insurance increase to a whopping 10% at the beginning of October 2016.
Insurance Company Profits
It should come as no surprise that your average insurance company aims to turn a profit, after all, they are businesses and not charities. A rather modest 2% from every insurance policy is swallowed up in this area.
However, after share holder returns, most insurance companies tend to reinvest their profits back into their business with the aim of not just growing, but improving their systems and process in order to ensure continued efficiencies and optimum customer retention.
© Joe Cann 2016