The mystery behind spike in car insurance premium

This article appeared originally in Gulf News: link to original article

I have always wondered how insurance companies cut it in terms of survival, considering the relatively low premiums they charge for car insurances. It seems to me that the business model cannot keep working given the low premiums. And having more insurance companies entering the UAE market, which naturally lowers the premiums.
That was six years ago if not more. This year, it seems that something has happened to awaken insurance companies and encourage them to increase car insurance premiums. Or how else would I pay more for a car that I have had for four years compared to a new car that I purchased less than two years ago? The former carries half the value of the latter, by the way.
There are three factors that I believe have been driving the current hike in insurance premiums: 1. the increase in insurance rates by insurance companies — change in the car insurance model; 2. the increase in car prices that I discussed in last month’s article; and 3. the increasing role of insurance brokers.
First, the insurance model. In an ideal scenario, an insurance company will try to benchmark its rates with the market and try to collect as many premium as possible from both its existing base of loyal clients and by attracting new ones via special offers — road assist, faster repair approvals, etc.
Part of the premiums are then invested on short-term and long-term basis, with some cash kept aside to manage a sudden need to reimburse for a car that has been written off — twice the case with me which is why, I guess, I am not on insurance companies’ good side.
The trick here is in the way the cash flow is being managed. Besides ensuring that certain amounts of cash go into the company’s accounts on a regular basis to match expenditure forecasts, insurance companies do not pay their dues to car dealerships and garages as soon as the car is fixed and handed back to the client. Instead, they rely on LPOs, which provides them with ample time to manage the urgent need to disburse write-off amounts.
The second factor behind the hike in insurance premiums is linked directly to car prices. If they keep going up, then it’s only natural for car insurance premiums to also go up.
This definitely defies the concept of moving towards a perfect competition in the car insurance market, which should subsequently lead to lower prices, i.e., car insurance premiums. Perhaps this could have been the case if there was no middleman. And if the focus was towards economies of scale rather than increasing the rate — by having more international companies entering the car insurance market in the UAE.
Also, clients should be profiled in terms of how many accidents, etc. with the higher rates being applied for the worst drivers. In other words, something similar to banks’ credit scores.
Don’t they always say — cut the middleman out? Brokers are supposed to make finding the best insurance deal much easier. That includes better rates, the insurance covering an additional GCC country, and perhaps allowing you to have your car fixed at the agency for more than three years.
Though given the fact that insurance premiums are increasing, there is no doubt here that brokerage fees are contributing to that. And anyway, what is there for a broker to do if a website with the right algorithms could compare all insurance rates and provide you with the best deal available in the market in relation to your insurance score?
As of now, the broker gets your documents and uploads them into a system that tracks down your car’s history and basically allows for insurance companies to post their offers.
The last thought that I want to leave you with is: why do insurance companies now refuse to insure cars with values exceeding this amount or that amount?