Insurance policies are always for 12 months. Why?

Question

just wondering why all insurance policies seem to be for 12 months. Is there any reason why insurance companies don't have eg 18 month policies. Or why not just rolling monthly policies? Are there any rules governing length of a general insurance policy?

Answer 1

Some are for 10 months, but 12 months was originally down to FSA (Financial Services Authority) who regulate all insurance companies say no customer can be bound to one company for more than 12 months!

Answer 2

There’s no rule defining how long a policy can be. It depends on the risk being insured as to what is an appropriate period of cover. Commercial construction policies can be in place for years (i.e. how ever long it takes them to build the thing) whilst other policies such as public liability for a big concert might only be effective for a few hours.

When it comes to domestic policies particularly property there are quite a few factors that come into play for picking a year as a standard term these include (not limited to);

Annual Risk Cycles:

Most risk cycles are annual, weather cycles are annual, one flood period, one hurricane season etc. So policies are repriced every year in light of the previous year’s experience. Long term policies are notoriously difficult to price as the longer the term, the greater the uncertainty so insurers would have to charge top whack to cover themselves….not good for the consumer. Also some months are far worse for weather than others… UK tended to be October & March…. Florida (from memory) it’s September. If insurers were to sell month by month cover they’d have to charge 10 times as much for some months as for others. again…. not really what most consumers want. They want to pay the same amount every month, an annual policy allows this.

Averaging out risk.

A month just wouldn’t be enough to average out good v bad, e.g. whilst sh*t happens, it doesn’t happen every month…. so the insurer gets your (and everyone else’s) premium in the 11 good months as partial offset for the claims it pays in 1 bad one. Short terms risk would probably attract a higher premium than the same risk spread over a reasonable term

And lastly

It’s convenient….. most people (and companies) think, plan and budget in years.

EDIT.

Re previous answer ...the FSA had nothing to do with it...the FSA is less than 20 years old for pete's sake. Annual policies go back donkey's years.

Anyway I've never seen an FSA restriction on policy term and I've spent enough time reading the d**n regs... it would be unworkable..... nope sorry , untill I see the Prudential reference for that I'm going to say that it's just plain wrong !

Answer 3

Would you really WANT rolling monthly policies? A new set of paperwork every month and the likelihood of higher premiums due to the extra processing needed to be done by the insurers.

Of course, most insurers will allow you to cancel your policy mid-term anyway when it comes to cars and houses, so you're rarely going to be bound to them, though you may find extra charges for doing so.

Answer 4

They are not.

It is possible to have a policy for a shorter period.

depends what you are insuring and the risk

Answer 5

insurance companies have to file with the state how they plan to sell insurance.  Home is generally 12 months and autos 6 months.  The underline reason is the cost of underwriting and opportunity to change policies.  If there is a large hail storm that comes through an area or other major loss to a company they will need to change rates to become more financial fit.  Also auto are continually coming out with new models, designs and the this allows the insurance company to make adjustments to pricing more frequently if they think they dont have it right.  This allow the insurance company to stay on top of there game.   Hope that helps.  Good Luck