Revealed: Where every cent of your vehicle’s insurance premium goes

WHEN it comes to motor insurance, nothing is simple.

Insurers’ reported losses are based on estimates. This is not unique to Ireland – only three of the 32 countries with membership of the Europe-wide lobbying group of insurers recorded positive underwriting results between 2010 and 2013: Finland, Croatia and the Czech Republic.

It seems the motor insurance business is conducted as a loss leader. So, in search of hard numbers, we can only analyse estimates to follow the money that comes out of motorists’ pockets in motor premium.

1. First up is the taxman. Since last July, the insurance levy has increased from 3pc to 5pc to pre-fund future potential insolvencies and deal with past failures. Using the €1,000 premium as our base, including that levy, means €48 goes to the Exchequer; €952 is left for everything else.

2. Insurers repeatedly estimate they will be paying out more in future claims than collected in premiums, so let’s assume no provision for profit. Where insurers assert a loss ratio is 114pc and say 80pc of outlay goes on claims, we can calculate, at break-even, claims would represent 70pc of exposure. Taking the premium, after levy, of €952 would indicate claims’ costs at €668. 3. Motorists may consider repair or replacement of their vehicle as the main benefit of insurance. In reality, it accounts for only about 12pc of the €952 – €117.

4. The minute you drive a new car off the forecourt, its value dives. Because this own damage cover is a minor part of the insurance, there may be only a moderate saving by reducing the sum insured to the market value. That’s all an insurer will pay in a loss. So, we’re left €551 of a premium to do with claims.

5. Damage by your negligent driving to another vehicle, plus possible car hire and depreciation, is estimated at 9pc of the €952 premium = €84.

6. That leaves us with €467 of the claims costs to account for, being 49pc of the premium (net of levy).Spoiler alert: More than 20pc of your premium has nothing to do with claims costs as such.

Since the Central Bank abolished annual publication in the Blue Book of insurance statistics for the Irish market, there is only visibility on the six main players. From those Solvency 11 reports for 2016, motor insurers have expense ratios ranging from 25pc to 33pc (depending on whether they are expressed relative to gross written, net written, gross earned or net earned premiums).

But let’s refocus on the claims’ costs. Using various sources it is estimated that, of the remaining €467 balance, third-party injury claims account for €409, and €58 has to do with litigation overheads – respectively 43pc and 6pc of premium (net of levy). Since the establishment of PIAB, 23pc of claims are resolved without legal costs for anyone.

The primary purpose of compulsory motor insurance is to provide people with indemnity against being held liable for negligently causing injury or loss.

It is now possible to estimate how much that would cost nationally. It works out at about 49pc of the €2bn you pay in premiums each year.

Using that, it is feasible to float two ideas. If compulsory motor insurance is uncoupled from own damage cover, it should be possible to develop a single market. Insurers in other EU states could estimate vehicle values and repair costs, unlike the purported volatility of injury awards here.

Then compulsory premium charges could be halved by taking insurers out of the equation. The role of assessing all injury claims could be assigned to an enhanced Personal Injuries Assessment Board (funded by an annual fee).

The delivery overhead in PIAB is only 6pc relative to compensation. This would avoid policyholders paying all the percentages that are going elsewhere – such as amounts consumed by insurers’ management expenses, payments to EU head offices as re-insurance, brokers’ commissions etc.

Perhaps best of all, there would no longer be a need to fund for insurer insolvencies – another 5pc saved.

The only losers would be shareholders in insurance companies. But surely nobody could argue the system is set up primarily for their benefit?