Comment & Analysis

Understanding pandemic generated changes in motor insurance risk

James Burton, senior director, product management, at LexisNexis Risk Solutions

Working from home, furlough, travel restrictions, financial stress – the extent of the motor insurance market’s disruption as a result of Covid-19 is becoming clear. Although there were major changes in car use and car sales in 2020 and the start of 2021, any significant disruption anticipated by the motor insurance market, has failed to materialise so far. 

Year-on-year analysis of car insurance renewals, switching, gaps in cover, cancellations and customers leaving the market have revealed both cancellations and gaps in cover were actually down in 2020 compared to 2019.  

Delving further to identify if any distinct age segments – in particular, older and young drivers – were disproportionately affected by lockdown or Covid-19, it became clear that no particular age group had an increase in cancellations or were forced out of the insurance market

This may seem counter-intuitive given reports of a rise in Statutory Off Road Notifications (SORN), where a car owner will formally notify the DVLA that they are not using their vehicle and therefore stop taxing and insuring it. However, shopping for insurance was down year on year – when people aren’t shopping, cancellations tend to fall.

The motor insurance sector was also quick to adapt to the changing situation to support their customers and our analysis points heavily to the fact that motor insurance is not a service people stop without a lot of consideration. Whilst motor cover is mandatory, the data suggests it is also seen as an ‘essential’ by most consumers. This simply heightens the importance of fair and accurate pricing at a time when the market is already preparing for the changes brought about by the new FCA rules.

But while our data suggests that disruption to policy behaviour was limited, and that there was a global reduction in the overall number of insurance claims, we did however see the number of fraudulent motor claims increase by 50% in 2020 compared to 2019

The need to ‘know the customer’ at all stages of the policy lifecycle has therefore never been greater. Market-wide policy history data can play a key role in helping insurance providers understand the impact of specific events such as the pandemic, on the way people manage their insurance. Insurance providers can then factor for these changes to deliver fair and appropriate pricing while reducing their potential exposure to fraud.

Through policy history data, insurance providers can also distinguish between customers who cancelled a policy or had a gap in cover, possibly as a direct result of the UK’s three national lockdowns, from those who may have done so for other reasons indicative of risky behaviour. 

Cancellation data can be powerful for the insurance market. Cancellations are shown to have a direct correlation with insurance claims and can therefore be a key factor in helping insurance providers understand risk and price insurance. Based on our analysis, an individual who has had one mid-term cancellation in the past has a 35 per cent higher loss cost relativity when compared to the market. Taking it to a more extreme scenario, an individual with 6+ mid-term cancellations has a 230 per cent higher loss cost relativity. 

Gaps in cover can also be indicative of higher claims costs. Insurance providers need to understand these risks at the point of quote in order to price accurately. They also need to consider the administrative cost of cancellations and the potential risk of bad debt if the premium is paid in instalments. 

However, if an insurance provider identifies a cancellation or gap in cover as occurring during one of the UK lockdowns, then they may view the risk quite differently. From motor policy history data going back six years from over 85% of the UK market, data like this at point of quote already helps predict motor claims losses and assess the risk of an individual based on their policy behaviour.

Now, a new set of Covid-19 related attributes has been created to help insurance providers identify at speed, at the point of quote, those cancellations and gaps in cover that occurred during the national Covid-19 lockdowns versus those outside of that time. 

While potentially small in number, those individuals who chose to cancel their motor insurance or allowed their insurance to lapse during the Covid-19 lockdown period should not be penalised for those decisions made during the pandemic and should be priced fairly when they next shop for insurance, renew their policy or make a mid-term adjustment. Policy history data can provide the valuable context insurance providers need to do the right thing for their customers.

James Burton is senior director, product management, at LexisNexis Risk Solutions

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