Will your Greenslip now cost more as a result of the reserve bank announcement yesterday?

As you are now no doubt aware, the Reserve Bank of Australia announced at 2.30pm on 4 Feb 2015 that there would be a softening of monetary policy and a decision that the official interest rate would be reduced by 0.25% (or 25 basis points) to an all-time record low of 2.25%.

“This decision has caught the markets by surprise” says Phil Lemiux of Marillion Insurance Brokers, “with not many economists expecting the RBA to move as it did this month. They were expecting a possible move in March 2015 and beyond. Many economists are now forecasting successive reductions in interest rates over the coming months.” “For those with home mortgages, this is welcoming news as it is expected the bank’s will pass on the full rate cut to their customers, given the easing on capital funding costs experienced by the financial markets over the past 12 months, ie. cash is cheaper. For those retirees living on interest earnings, this is not welcoming news as their earnings will now be diluted by the adjustment in interest rates on saving accounts and term deposits.

But how does this affect the price of a CTP greenslip?

“Well it is pretty simple” says Phil, “and it is not welcoming news unfortunately”. “For a class of insurance like CTP Greenslips, the premiums paid by customers is held in reserve until such time as claims need to be paid. This can often be many years down the track. During this period, these reserves are invested in the financial markets, often in interest bearing securities, until they are needed to pay claims, delivering an income source to insurers over that time. The more interest income earned by insurers, the less they need to charge for a CTP Greenslip as savings, in a perfect world, should be passed onto consumers in the way of cheaper or cheapest premiums. These interest rates help to determine what insurers should be charging customers so they meet their financial commitments over time. Insurer’s financial commitments include claim costs, expense costs to run the operations, distribution costs and finally profit margins. The higher the investment rates, the higher the investment returns and the less insurance companies need to charge customers to meet their financial obligations for this class of business.

It is always interesting to see how insurers react to such financial news and with everything else being equal, insurers should lift their premiums due to the reduction in investment earnings. But many are keen to grow their customer base so not all insurers will react in the same manner. “It is always best” says Phil “to ensure you keep shopping around at greenslip renewal time and ensure you are getting the cheapest greenslip price as there are many factors that unfold during the year which can affect the price of a greenslip and most importantly, not all insurers react in the manner”.