The measures put in place for the Covid-19 pandemic are likely to see a substantial reduction in motor insurance claims, but the future of the industry lies in usage-based insurance (UBI).
There is no doubt that the unprecedented measures taken by the UK government in response to the Covid-19 pandemic are having a profound impact across global society and business. The insurance sector is by no means an exception. On the contrary, over recent weeks the pressure has ramped up on the trigger and payment clauses for a variety of covers – travel insurance, business interruption, credit default, to name but a few.
Motor insurance is not immune to the impact of the Covid-19 crisis. The movement restrictions put in place on 22 March – instructing people to stay at home and for non-essential businesses to close – have had a dramatic effect on road usage.
Given that motor insurance is a compulsory purchase, and typically the main revenue stream for most insurers, a lot of number crunching is taking place to estimate the financial impact of these measures. With less driving occurring day to day, one would expect fewer claims in the short term.
That said, bigger questions arise around the medium- and longer-term impacts of certain mobility restrictions staying in place until well into 2021, as some experts suggest. Would the existing model of annual cover be appropriate or even acceptable to consumers?
A database of more than one billion miles driven, derived from My Policy Group’s mobility analytics business, Minerva, provides insight into the changes taking place across the driving landscape between 23rd and 29th March compared to the previous week:
- Miles driven dropped by 55% during weekdays and by 68% during the weekend
- Driving behaviour has deteriorated with increased speeding observed due to emptier roads
- There is a shift away from motorways and other safer roads
Based on the above data, we can extrapolate what the short-term claims costs are likely to be for insurers. The granularity of data obtained from the telematics devices, combined with the proprietary predictive tools allows us to estimate a 60% reduction in claims costs. Additional data exists that can refine those estimates to a more granular portfolio-specific level which in turn can support insurance companies with their profitability and pricing strategies.
While the reduction in claims costs might be welcome news for insurance companies in the very short term, the longer-term outlook appears more challenging should current restrictions remain in place for a prolonged period.
With driving tests cancelled for the foreseeable future, new business volumes to first time drivers are dropping to zero. The combination of the newly passed driver pipeline drying up, and the challenge of pricing drivers who aren’t driving, is creating a real headache for insurers planning for the long term.
Improved visibility on risk pricing provides a solution to this growing dilemma. Telematics has been used for some time now, but it has only succeeded in capturing the first time and low mileage driver segments of the market.
We believe that the current environment offers a sustainable platform for insurers to expand their business model and start offering Usage Based Insurance (UBI) to the experienced driver segment of the market. The introduction of a subscription model with an additional charge (estimated in pennies) per mile driven, can add flexibility to changes in driving patterns.
UBI is an exciting new product, and we think it has significant potential especially as more connected cars are registered. Insurers would do well to consider incorporating it into their plans. Once it hits the mainstream, UBI will inevitably become popular for many drivers, but when faced with a prolonged lockdown or driving restrictions, many drivers will look at UBI as an attractive alternative to the constraints of traditional annual insurance policies.
Tassos Anastasiou, CEO, Minerva, My Policy Group’s mobility analytics business