Special Report

Motor Insurance Research 2019

What’s fueling motor insurance today? Michele Bacchus talks to the industry and gives the low-down on what’s heading down the highway towards insurers in both the fast and slow lanes

With driverless cars on the radar, telematics policies still gaining traction among young drivers, and advanced driver-assistance systems becoming increasingly commonplace, the motor industry has developed considerably. But has it moved enough to appease an increasingly demanding consumer base or tackle claims inflation?

Motor claims costs

UK society is generally happy enough to pay rock-bottom prices for distress purchases such as insurance yet the prevalence of fraudsters continues drain the industry of money as insurers and regulators scramble together to catch the criminals responsible for putting pressure on prices.

Claims fraud (1st) and personal injury (2nd) were named as the top two major contributors to the inflation of motor claims costs in the present market, followed by credit hire (3rd) and repair costs linked to Adas and technology (4th).

While the industry is using the fundamental dishonesty provisions to good effect, according to Peter Allchorne, motor partner at DAC Beachcroft, fraudsters “still see motor insurers as fair game and don’t expect to be caught out. Motor fraud is still a significant issue for our clients, most of whom have effective systems in place for identifying and tackling opportunistic fraud”.

As for personal injury, Allchorne is confident the Civil Liabilities Act will bring a welcome change, reducing cost incentives, controlling volume, and taking out the “fat still left in the system”. “Personal injury has been a driver for fraud and needs controls placed on it to remove the incentives that encourage the bringing of both spurious and very minor claims,” he adds.

For Stephen Jones, UK head of property and casualty pricing, claims, product and underwriting at Willis Towers Watson, claims fraud and personal injury are secondary issues.  “Increases in vehicle repair costs are in my experience the most important factor, driven by increasing repair complexity and constraints on repair shop capacity.” Indeed, repair costs – linked with body repairs (5th) and repair costs linked with labour costs (9th) also featured prominently.

David Williams, managing director, underwriting and technical services at Axa Insurance UK explains further: “Expensive sensors are placed on bumpers and other exposed areas around the vehicle, where they’re most likely to get damaged. Once replaced, they need to be recalibrated, adding to the bill.”

However, calibration is not a simple process and requires further skills and more connected devices. “Not all body shops have staff that are skilled enough or have the equipment to carry out those repairs and recalibration,” continues Williams, “fewer options mean less competition, which leads to higher prices.”

Insurers are taking steps to counteract this issue. Dave Foster, motor engineer team leader at Covéa, says the company takes its obligation towards ensuring safe, high-quality vehicle repairs very seriously.

“We’ve invested in digital technology that’s helping us to work more efficiently, and we have strong relationships with our repairer partners so we can offer the right vehicle repair to our customers.”

Interestingly, keyless car theft was only ranked 8th despite the rise in vehicle theft and consequent claims. “The frequency of vehicle theft has increased by 50% in the past four years and 15% in the last year alone. The increased theft risk is fueled by the simple fact that keyless cars are easier to steal,” comments Tony Newman, technical claims manager at Allianz. Other factors cited included distracted driving (6th) and underwriting fraud (7th).

Brexit fears

With politicians weighing up the pros and cons of different Brexit outcomes, right up to the original 29 March deadline, the lack of certainty means insurers have had to prepare for eventualities. As such the biggest fear in terms of the knock on impact of Brexit on the motor insurance market is an increase in need for parts to be imported from foreign manufacturers, taking much longer to procure and most likely with a higher price-tag.

“With a deal yet to be agreed [at the time of the poll], Brexit brings much uncertainty which is now bringing cost to the industry as it responds to the various scenarios,” states Glyn Hughes, director of motor underwriting at Ageas, “We’ve been working with our supply chain and they have increased stock levels as a contingency in a hard Brexit scenario to minimise the initial impact.”

Green card administration costs are the second biggest fear, wholly dependent on whether Britain gets a deal or no-deal, with one insurer already having estimated an additional cost of £170,000 every year for postage and green paper in this event.

An increase in labour costs, a rise in fraud and funding cuts in road infrastructure, were ranked 3rd, 4th and 5th respectively, though for Jones of WTW, the potential impact on credit hire costs should be mentioned.

“A significant portion of any motor insurer’s property damage claims will have an associated credit hire component which may, for example, involve payments to provide a customer with a hire car during repairs. But if there are parts shortages or delays for an extended period, increasing repair times, then over this period hire lengths increase and so do credit-hire costs.”

The uninsured

One thing is clear: nothing is clear until the government works out in which direction to take the country. In the case of a worst case Brexit scenario, one knock-on effect that may have been so far ignored: is that on uninsured drivers.

Uninsured drivers continuing to flout the law and put lives at risk is considered a major burden by over half of respondents and one-quarter believe it is on the increase.

“This is especially true now as uninsured driving has historically been correlated with economic downturn. It is widely predicted that Brexit may result in an economic downturn in the near term,” observes Jones.

In the meantime, the police, the Motor Insurers’ Bureau and insurers must continue to work together to fight this crime. “Police operations seizing uninsured vehicles have played a brilliant role in deterring this, and the MIB’s ‘Gone in Seconds’ campaign has been a great success, explains Williams. “But it is the sort of message you need to keep hammering home. We, as an industry, need to keep banging on about it, the consequences specifically.”

Calling for a “collaborative approach across the industry, regulators and government to reduce the amount of fog”, Ian Hughes, CEO of Consumer Intelligence, describes a downward spiral that “reduces trust, increases fraud and causes uninsured driving”.

Clamping down on CMCs

Although the introduction of the Civil Liabilities Act may not have much impact on uninsured drivers, another scourge of the insurance industry will definitely come under the radar: claims management companies.

The combined force of the Act and the effect of CMCs coming under Financial Conduct Authority control from 1 April will surely have a consequence for this maleficent section of the industry.

“I’m confident the FCA will have teeth which the previous regime didn’t: it will be able to hand out meaningful fines and take action to stop unscrupulous claims farmers and directors from just setting up a new CMC down the road. So overall, I’m quite optimistic,” states Williams.

Nearly three-quarters of respondents are certain they will see a decrease in the number of CMCs while one-fifth believe no change will occur.
Laurence Besemer, CEO of the Forum of Insurance Lawyers, agrees there may not be any change but believes the overall landscape may change. “The number of licensed CMCs is likely to drop in our view but it remains to be seen whether this will reduce the number of claims made or whether a smaller number of larger CMCs will continue to facilitate and encourage the same number of claims.”

This view is mirrored across the insurance market, with Newman stating the market will “become consolidated and fewer players will expand to fill the void left by others”, and Jones explaining that CMCs “may instead become the outsourced handlers of small bodily injury claims, for which there is likely significant demand”.

The market has already witnessed this in January this year when National Accident Helpline was granted approval to set up as an alternative business structure.

“So, when the dust settles,” continues Jones, “rather than witness their demise, it is possible that we will simply see this as a tipping point for the transition of their position within the claims ecosystem.”

Whiplash worries

Many believe the new Act will help whiplash claims fall: one-sixth of respondents anticipate a decrease by 25% while one-fifth are more conservative, believing claims will fall by between 6% and 10% . Newman, however, isn’t convinced: “More claims will be presented by litigants in person and as a consequence of the new system, those individuals will receive faster compensation and retain 100% of it. The win for insurance customers is that legal fees will not be payable on most of these claims. So frequency will remain relatively flat with a slightly reduced cost.”

CMCs may have to do more scurrying to persuade claimants to use their services, as LiP turn to a self-serve portal. But regardless of who brings forward the claim, “the damages are being re-set to a more appropriate level and there will be no costs recovery in the vast majority of claims”, according to Allchorne, who hopes to see “a significant reduction” in minor injury claims.

He postulates that although whiplash claims may become “less fertile ground” for fraudulent claims, some fraudsters may “seek to exaggerate or embellish their injuries to evade tariff-based damages and avoid the costs-free environment of the small claims track”.

Displaced fraud

Although the market is quite certain businesses will be able to pass any saving from the CLB back to policyholders, concerns are also being raised as to the general impact of the Act, with fraud displacement (1st) into other areas, delays in the LiP portal (2nd) and increase in CMC activity in motor (3rd) cited as key worries.

Another possible consequence of the Civil Liabilities Act, according to Jones, is the impact on mainstream claimant lawyers, who have “historically served as a filter to ensure the majority of claimants are reliable”. These lawyers will inevitably become less involved in motor claims causing a potential slip in due diligence. “This significantly increases the risk of more fraudulent claims in a post-Civil Liabilities world,” he warns.

Telematics

This post-civil liabilities world will increasingly become a technologically connected and controlled one, with purchases of telematics policies having increased from 90,000 to 975,000 since 2011. And although the same period boasts a significant drop in casualty rates among young drivers, the insurance industry is still waiting for telematics to take off, with 55% of respondents stating the market for telematics is growing slower than anticipated.

For Jones, the telematics market was never going to exceed 10% of policies anyway, “because the mainstream consumer values product simplicity and many dislike their driving habits being monitored”.

The predominant market for telematics policies remains largely young drivers until perhaps public opinion can be swayed regarding installing what can be considered yet another Big Brother spying device.

“We believe market growth depends on a number of factors – getting drivers confident in how their driving data is analysed is key. The industry needs to be clear with customers about how their data is managed, who can access this data and when,” comments Paul Stacy, automotive director at Lexis Nexis Risk Solutions.

But it is not just public confidence that is affecting the sales of telematics policies.  Penny Searles, CEO of Smart Driver Club, believes there are two main reasons for the slow uptake of telematics and neither of them have anything to do with public opinion: the loss ratio gains expected from telematics have not been achieved across the market, and the industry is still awaiting a centralised data pool.

Blaming the “inability of larger claims departments to capitalise on the data in a speedy and efficient manner, thereby reducing the claims costs”, Searles acknowledges the chicken and egg scenario: “Until the volumes of policies grow where telematics data is available, claims teams cannot dedicate personnel and new systems to claims management.

“It would massively help accelerate the number of policies available if we could tap into all the data available, particularly from original equipment manufacturers-connected car sources.  In the same way as the credit bureaus started, there needs to be co-operation from those that have the data if we are to move forward,” she concludes.

Frustration with the lack of data-sharing is not new and until the industry buckles down to job of centralising connected data, telematics may continue to remain in the wings of the car insurance arena despite the clear advantages to industry and drivers this technology appears to bring.

Discount rate

When asked about the discount rate and where it would settle when next reviewed, the overriding response is between 0.1 and 1%, although answers ranged from -0.1% and 2% (see below).

“For an industry that is all about managing risk, it is fascinating to see how many ‘unknown issues’ there are that are totally beyond insurers and the industry, such as Brexit and the Ogden rates. All of these things are massively variable and even in the discount rate answer the variance between whether you think the answer is 0.1% or 1% will massively drive your thinking.” comments Ian Hughes, CEO of Consumer Intelligence.

With the Ministry of Justice’s review having started on 19 March, one can only hope for a positive announcement before the 6 August deadline. As Peter Allchorne, motor partner at DAC Beachcroft, notes: “The government has been clear that it wishes to adopt a real world, rather than theoretical approach to setting the rate.  No-one when investing in the real world would accept a negative return on their money, so we should be seeing a return to a positive rate as the outcome of the reforms.”

Assisted driving

Another sub-market that has seemingly won over the insurance industry is that of Adas with nearly two-thirds of respondents stating the positives outweighed the negatives.

As the market stands, under 30% of the vehicles on most insurers’ books are Adas-enabled according to the research although, by 2020, the same number predict over half of all vehicles will be Adas-enabled.

Will this increase driver safety and reduce accidents? Stacy believes so. “We know through studying the data of over 12 million vehicles that Adas has a significant influence in reducing frequency of accidents and severity and could have a material impact on pricing,” he explains.

“With Adas-enabled vehicle information anticipated to more than double in the next year, the industry needs to consider how vehicle data including Adas features could be leveraged at point of insurance quote to improve pricing accuracy for motor insurance.”

However, adds Jones: “When it comes to risk reduction, early analytical findings suggest that of all the major Adas features, only autonomous emergency braking really matters in reducing accident frequency. There is a defensible hypothesis that parking sensors actually de-skill drivers and provide them with sensory overload, eradicating the expected accident reduction benefits.”

The industry is clearly divided on many issues, and as the Civil Liabilities Act comes into force, the FCA takes charge of CMCs and the discount rate is reset, motor insurers will face an array of complexities notwithstanding all the changes brought on by the oncoming connected car industry.

All this will, of course, make motor policies more difficult to price, plan and transform however as Martin Milliner, general insurance claims director at LV, remarks: “These variables are catalysts of change and provide opportunities to differentiate or find winning formulas to grow your business and service customers better – so let’s not wish for certainty on all fronts too soon. Who said insurance was a boring profession to be in?”

Motor Insurance World: Driving Towards a Safer Future

Bringing together senior representatives from the UK’s leading insurers, regulators and motor manufacturers, Post’s Motor Insurance World 2019, on 13 June at Mercedes-Benz World in Surrey, will explore the key issues currently facing the motor insurance sector including the future of telematics and the shared economy.

For more information and to sign up