Motor Insurance Companies have been battling low profitability for more than a decade now. In 2013, they had to pay £1.08 in claims and expenses for every pound they underwrote (combined ratio more than 1). This situation isn’t expected to change much in 2020 as the recent EY report in the UK estimates a combined ratio of 104.7% in 2019 and 107.6% in 2020. This, coupled with the fact that less than one in two people renew their policy with their current carrier has been the biggest factor in negligible underwriting profits of the motor insurance in the last 15 years.
The primary reason the combined ratio (claims + operating expenses to underwriting revenue) is more than one is that claims make up to 80% of the underwriting value. And things aren’t looking up.
The factors which have played the biggest role in increasing combined ratios, and thereby underwriting losses, are:
- Low Premiums: Price comparison websites have given the consumers the ability to find the most competitively priced policy. Given that there’s no perceptible differentiation between two competing products or brands, consumers choose low-cost options, and thereby insurers are forced to compete only on price. The PTOLEMUS Mobile Insurance Global Study states that 88% of the motor insurance programs worldwide are based only on low pricing and discount.
- High cost per claims: As cars are getting more advanced, the cost of fixation is also increasing. Today, repairing a fender bender requires installing new parking sensors too. For the insurer, this means high claim costs without the corresponding increase in premiums.
Apart from the low combined ratio, the below-mentioned factors have engendered high attrition rate, and thereby low Lifetime Value (LTV) per customer :
High attrition rate: In the first year, insurers need to pay brokerage, but they get to pocket that when the customer renews the policy in subsequent years. This means that insurers make a profit on a customer only in the second, or sometimes, in the third year. But a combination of low customer engagement, commoditization, and access to the most competitive has resulted in more than 50% attrition in the UK. For insurers, this means low Lifetime Value (LTV) per customer.
While Telematics offered hope of measuring risk accurately and allowing personalized pricing, it has struggled with customer adoption. Primarily because though the driver behaviour data is valuable for the insurers, it fails to offer meaningful value to the customers.
When we look at these challenges, not in silos but intertwined factors and shift our point of view to the customers, interesting solutions start taking shape. Driving safety is a mutual interest of both customers (and their families) and the insurers. A recent study by Cambridge Telematics showed that 57% of the drivers wanted their insurers to provide them with safety features and services.
What if we could build technology solutions to help drivers avoid preventable high-risk situations? What if we could do this by leveraging the smartphone he already carries? What if we could re-define the role of motor insurance in the lives of customers?
Accidents happen due to a myriad of reasons like distractions, speeding, fatigue, driving habits (acceleration, braking etc.), and external factors like weather, road conditions, other drivers, vehicle failure etc. But some of these risk factors like speeding, drowsiness or known accident hot-spots can actually be identified or predicted by smartly utilizing smartphone data, real-time traffic information and machine learning. Having identified these risks in real-time why can’t we guide the drivers to be better prepared for or avoid them altogether?
A solution like this from insurers to their customers not only helps reduce claims but also provides them with a platform to meaningfully engage with drivers daily, provide tangible value, and build a long-term relationship with them.
Technology is already enabling new business models in Insurance like UBI, BBI, or byte-sized policies. Vitality has demonstrated that technology can make health insurance preventive. Driving assistance technology has the potential to unlock new service offerings and value-proposition of insurance and re-imaging motor insurance as truly personalized, preventive, customer-centric.