Art. 02 · What a risk costs · 3 min read
The loading factor
No insurer will sell you a pound of risk for a pound. The gap is not a scandal. It is the business model, and its size should change what you buy.
Say a risk genuinely costs £1,000 a year: that is the long-run average of the claims it will produce. The premium will never be £1,000. It will be something like £1,250 or £1,400, because the insurer also has to pay for staff, systems, the broker, the capital it must hold against a bad year, its own reinsurance, tax, and a profit.
That multiplier is the loading. It is the price of certainty, and it is entirely legitimate. But it has two consequences worth sitting with.
- Expected claims: money that comes back to policyholders
- Everything else
First: over a long enough run, insurance is expected to cost you more than the losses would have. That is arithmetic, not cynicism. What you buy with the difference is the removal of uncertainty, which is worth a great deal when the loss could close you and almost nothing when it couldn't.
Second: the loading is largest where the insurer is least sure about you. Some of that margin is pure uncertainty about your particular business. An insurer that cannot tell whether your building is well maintained assumes it isn't, because assuming otherwise loses them money. Better information about your property genuinely reduces the uncertainty part of the loading. This is the one component you can move without changing anything physical.
Use it
- Ask for your loss ratio. Over the last five years, what have you paid in premium and what has been paid out in claims? That ratio is your personal loading, after the fact.
- Expect to be down over time. If you have paid in more than you have claimed, the policy hasn't failed. That is what a working policy looks like.
- Attack the uncertainty margin. Bring evidence to renewal: maintenance records, inspection certificates, upgrades. Reducing what the insurer has to guess about is the cheapest premium reduction available.