All insurance premiums should be charged in retrospect not advance

I was checking out bike insurance and noticed Laka has a very interesting and clear premium calculation. They sum up all the claims paid out that month and distribute that as premium to all policy holders. 

Why aren't other lines of insurance doing the same? It seems like its in the best interest of us as consumers?

Comments


  • Why aren't other lines of insurance doing the same? It seems like its in the best interest of us as consumers?

    I think you've answered your own question there 😁
  • HappyHarry
    HappyHarry Posts: 1,538
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    I was checking out bike insurance and noticed Laka has a very interesting and clear premium calculation. They sum up all the claims paid out that month and distribute that as premium to all policy holders. 

    Why aren't other lines of insurance doing the same? It seems like its in the best interest of us as consumers?

    Because in a high claim month, everyone's premiums rise sharply. Knowing what your insurance premium is on a monthly basis is essential to budgeting for many people.
    I am an Independent Financial Adviser. Any comments I make here are intended for information / discussion only. Nothing I post here should be construed as advice. If you are looking for individual financial advice, please contact a local Independent Financial Adviser.
  • DullGreyGuy
    DullGreyGuy Posts: 9,182
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    I was checking out bike insurance and noticed Laka has a very interesting and clear premium calculation. They sum up all the claims paid out that month and distribute that as premium to all policy holders. 

    Why aren't other lines of insurance doing the same? It seems like it's in the best interest of us as consumers?

    Because if they did that they would go out of business very quickly as they aren't covering their cost of sales, their Finance staff doing their corporate or statutory returns, taxes etc. Similarly not covering the risk of customers not paying or being unable to pay what they are due. 

    They however aren't an insurer, for their commercial insurance Zurich is the insurer and liability is capped to £5m. For any vehicle requiring compulsory insurance there must be unlimited liability cover. Its where you are putting uncapped premiums onto your insureds where it gets risky. 

    Let's say they are bigger than I am thinking and have 10,000 policyholders and are unfortunate and have two max claims in a month. Are you happy to pay out £1,000 extra premium for that month on top of the £30 or whatever was anticipated?

    There are mutual insurers, look at the old P&I clubs for shipping, where you pay an estimated premium up front and that is adjusted over the next 3 years as the claims start coming in but there its clear you are also covering all operating costs not just claims. 

    London P&I asked its members to pay an extra £75m in 2022 after it found it was paying out £137 in claims and costs for every £100 of premium exc tax it was receiving, which could be fairly painful to pay your share of.
  • Aretnap
    Aretnap Posts: 5,140
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    I was checking out bike insurance and noticed Laka has a very interesting and clear premium calculation. They sum up all the claims paid out that month and distribute that as premium to all policy holders. 

    Why aren't other lines of insurance doing the same? It seems like its in the best interest of us as consumers?

    That doesn't seem to be how it works though. Even if you disregard the fact that they obviously take an amount for running costs and profit margins, it would also expose their customers to the risk of very high or even unlimited costs if there was a sudden rash of bike thefts in London, or worse if one or two of their customers had very large third party liability claims in quick succession.

    But having just looked at their website they quoted me "usually around £15/month, but never more than £19/month". So there is obviously a perfectly conventional insurance product underlying their offering, with some flexibility to vary the premium a little if claims are a bit higher or lower than anticipated. But it will not go up hugely if claims are much higher than expected, nor do I suspect would it go to zero if nobody made any claims at all. All of which makes it look more gimmicky than revolutionary to my eyes.

    In any event I get perfectly good bike insurance for about a fiver a month as an add on to my home insurance policy, so paying £15 (or maybe £19) a month for a.gimmicky stand alone policy doesn't feel like it's in my own best interests.
  • born_again
    born_again Posts: 13,665
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    I was checking out bike insurance and noticed Laka has a very interesting and clear premium calculation. They sum up all the claims paid out that month and distribute that as premium to all policy holders. 

    Why aren't other lines of insurance doing the same? It seems like its in the best interest of us as consumers?


    How much is the average bike insurance payout? A guess would be sub £1K

    Transpose that to car insurance. Average payout is massive compared to a bike payout. 

    Just look at the Luton Airport car park fire... Could the average car driving person afford the hike for that?


    Life in the slow lane
  • dunstonh
    dunstonh Posts: 115,712
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    Just look at the Luton Airport car park fire... Could the average car driving person afford the hike for that?
    Even a single accident with a life changing injury or death can result in settlements running in the millions.

    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • molerat
    molerat Posts: 31,562
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    edited 27 October 2023 at 3:54PM
    dunstonh said:
    Just look at the Luton Airport car park fire... Could the average car driving person afford the hike for that?
    Even a single accident with a life changing injury or death can result in settlements running in the millions.

    How much did the Landrover and trailer onto the railway line cost the insurer ?
    News stories at the time estimated £40M - £50M

  • wheldcj
    wheldcj Posts: 73
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    I create insurance products and this is an interesting concept, believe me if insurance companies could guarantee a 20% margin they would.

    Some insurance claims, especially third party can be IBNR (incurred but not reported) or simply long tail i.e. they take a long time to be reported or long time to settle.  Looking at the website I think that all cover is small value, own property type claims and there is also a strict 28 claims notification condition.  So they will be able to quantify the amount lost quickly and there is little chance of any late claims coming in.   This is fairly uncommon for insurance beyond bikes, mobiles etc.

    There appears to be no cover for the riders injury and I can't tell if the third party liability (capped at £2m) is provided as a separate policy or not.  If it is included in the pricing model then I would be interested to know how that would work.  

    Let's say driver A hits an elderly pedestrian in January, a claim is reported in March but is deemed to be minor and is reserved at £1,000.  Assume all policyholders pay their proportion of £1,000?   I take out insurance for first time in November and at this exact point the pedestrian dies and claims come through that the initial accident was the likely cause.   The reserve increase to £200,000.   Although I wasn't even a policyholder at the time I now have to pay the maximum?   

    Let's further compound this by saying that because of Cap's in the policyholders schedules Laka are £100,000 short.   What do they do?  The will almost certainly have reinsurance but this will have to be paid out of the 20% margin.  If I was a reinsurer I would see that paying above the cap every time there was a sizeable loss was inevitable and increase my premiums a lot.   Soon that 20% margin will have to be far higher and then policyholders will think they are being ripped of because the collective sharing seems on the face of it unequitable.   Or you increase policyholders cap.   If I start seeing that my monthly premium could be anywhere between £8 per month or £50 per month for example I think I would be put off.

     

  • 400ixl
    400ixl Posts: 2,642
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    If given the OP's user name this is a thread to market test a business idea, as you will see outside of very specific use cases where the liability is very closely known and contained this will not work.
  • DullGreyGuy
    DullGreyGuy Posts: 9,182
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    400ixl said:
    If given the OP's user name this is a thread to market test a business idea, as you will see outside of very specific use cases where the liability is very closely known and contained this will not work.
    Other than for the fact that something like 90% of the worlds P&I insurance is written on a non-fixed premium mutual basis (circa $3.8bn per annum of premium) and given its marine and liability its long tail business. There are other considerations which make it work though. 

    Interestingly those insurers also write some fixed premium insurance (P&I and/or other classes) and so any profits emerging from that business helps subsidise the claims pool fund for the mutual business. 
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