The car insurance industry has remained stagnant for the last decade with providers often sticking to the ‘status quo’; if you shopped around for a new policy recently, you would have found little variance in what they offer. However, with manufacturers, such as Tesla, introducing electric autonomous cars, the future of insurance and car insurers specifically have been forced to adopt a new mindset.
The way consumers are driving and using their cars has changed, whether its EVs, self-driving or just a reduction in time spent on the road following the coronavirus pandemic. This means car insurers will have to adapt to new driving behaviours. The new generation, for example, are less desirous of owning an asset, i.e. car, but more interested in a seamless solution to their mobility needs. This will need to be done through a number of ways, not least by leveraging advanced data analytics to ensure safety, serviceability and affordability.
Steering away from the (one year) cliff
The current car insurance model provides two options: an annual payment or a monthly payment which tends to incur a slightly higher overall charge. When it comes to the former, which is often the favoured choice, insurance providers often offer a first-year discount to lure customers in. This has led to an overly saturated market.
Once the year is up, customers are then hit with an increased premium – a heavy blow to their pocket, forcing them to shop around for cheaper options. Also known as the one year cliff, this current method of providing car insurance is flawed as it diminishes customer retention and profits. And so more and more customers are looking to aggregator websites to find the cheapest deal, making insurance a mere commodity.
However, with the likes of Tesla now offering electric, semi-autonomous cars that capture ‘real-time’ data, insurers will be able to analyse individual’s driving habits i.e. the routes taken, regular commute times and average speed and produce dynamic projections about future outcomes; enabling a customer-based pricing model on a daily, weekly or monthly basis to be devised. Not only will this customer-centric approach create a shift towards ‘prevention’ over ‘protection’ policies, dynamic, risk-based pricing will also prompt consciences driving by individuals.
Driving a data approach
For insurance providers to survive and thrive, it is crucial they review their ‘repair’ and ‘replace’ model and adapt to emerging data sources; allowing for the curation of smart policies for customers. By collecting data from incidents as they happen, insurers can understand the common signifiers of potential risks that lead to claims. With this insight, insurers are more accurately able to predict high-risk scenarios and alert their customers to deal with them faster.
Moreover, it can help them deal with fraudulent claims. Fraudulent claims can be costly to insurance providers and a recent study found a total of 107,000 fraudulent insurance claims were made in 2019, worth approximately £1.2 billion. If insurers are quick to adopt emerging data sources, they can reconstruct driving incidents in their entirety and analyse claims objectively, disputing those that don’t align with data insights and as a result saving time and money.
The emergence of ‘non-traditional’ cars will add another layer of complexity in the insurance sector. For example, when an electric vehicle is on the motorway in auto-pilot, it will adhere to appropriate speed limits and the sensors will detect movement around the vehicle, removing accidents from human error. In the rare instance of an accident the manufacturer will be liable and subsequently obliged to pay-out, not the driver. As a result, insurance providers will have to offer ‘hybrid policies’ that factor vehicles alternating between auto-pilot and manual driving.
Preparing for an autonomous world
The future of the car insurance landscape is set to drastically change. A recent study found that nearly one in eight newly registered cars in the UK could be hybrid or electric, with respondents also indicating that they would consider purchasing an electric or hybrid car in the next three years. It’s inevitable that further car manufacturers will invest in producing cleaner cars which are semi or fully autonomous.
And while Tesla had a significant head start, traditional car brands and tech giants such as Google will be keen to join in on the journey. It is therefore vital for the car insurance sector to focus on the metric of prevention by analysing ‘real-time’ data. Failing to adopt this approach will lead to technology-enabled competitors soon dominating the market.
By Manan Sagar, CTO for Insurance at Fujitsu