How External Factors Impact the Insurance Premium

In the previous blog post, we debunked the popularly held misconception that insurance providers determine the insurance premium arbitrarily. The article discussed in detail how customers themselves affect their premiums. In today’s article, PitStopArabia will continue to talk about the different benchmarks used by car insurance companies in the UAE and the rest of the world. However, the focus is on external factors instead of the customer. Let us start.

Weather

Extreme weather conditions result in more claims than normal weather. For instance, during the winter months in Europe, insurance claims increase substantially due to the bad weather. Snow and ice contribute to more accidents, resulting in more claims. Extreme heat also increases the likelihood of accidents. Tire bursts and mechanical problems are common during extreme heat. You might not believe it but insurers use this data to determine the premium. If you are living in areas where the weather is harsh, you can expect a higher premium.

Repair Costs

There is no doubt that repair costs are going up just like the cost of other products and services. When the car owner’s claim is successful, the insurance company has to get the vehicle repaired. It means that they have to pay the workshop for the repairs. Higher repair costs mean that the insurance company has to pay more. Keeping this in mind, they would charge customers higher premiums. After all, insurance companies are also a business. If they do not increase the premium, their profits would decrease. The sole purpose of any business is to earn a profit.

Spare/Replacement Parts

If a vehicular component is damaged beyond repair, it needs to be replaced with a spare. Depending on the vehicle make and model, spare posts can cost very little or a fortune. Therefore, their price will also determine the premium. At times, market forces can also lead to an increase in replacement parts. Insurance companies consider this data as well while determining the insurance rate.

Nature of Claims Market

Insurance companies keep data on the nature of the claims market. For instance, they will analyze how the claim market is changing over the past few weeks, months, and years. There might be growing claims for whiplash, head injuries, windscreen damage etc. Certain injuries and vehicle damages are more expensive than others. If the claims market indicates that they are increasing, it might lead to an increase in the premium because these claims raise the cost for insurance companies as well.

Changes in Law

Changes in the law regarding automobile insurance also impact the costs. For instance, the UAE government might decide that very minor injuries will no longer be covered under personal injury claims. This means that insurance companies in the UAE do not need to pay claimants’ money for such claims. It reduces the cost for them, and they might pass it on to customers. It would result in a reduced premium. On the other hand, if the government decides to include very minor injuries in personal injury claims, the premium will increase.

Taxes and Other Costs

The UAE government can decide to introduce new taxes related to the automobile insurance sector. This would increase the cost for the insurance companies who would pass the increase onto the consumers. It would raise the premium. Likewise, the government can decide to reduce taxes. The reduced cost of doing business can be passed onto the consumers by the insurance providers which would result in a low premium.

Number of Successful Claims

If there is an increase in the number of successful claims, expect the premium to get higher. Higher successful claims mean that the insurance companies must pay more money to claimants. On the other hand, if there are low claims for a substantial time, companies may pass the savings onto consumers.

Wrap Up

This concludes our article today. PitStopArabia is hopeful that you now understand what metrics insurance companies use while calculating the premium. If there is still any confusion, feel free to ask us. We will be more than happy to help you. Lastly, do keep in mind that insurance companies have access to a considerable amount of data. They can use this data to come up with metrics that were not covered in this article or the previous one.