The national media has been full of ‘I couldn’t believe how much my car insurance costs’ stories. Those of us who work in the industry predicted big premium hikes last year after insurers reported unprecedented claims inflation in their half year results, but the 43% premium inflation, set against underlying 6.7% inflation (source ONS Sept 23) has taken the public by surprise.
It’s not only experienced drivers who are feeling the pain. Young drivers have been hit by a double whammy; rocketing premiums plus lack of supply, as a number of providers have exited the young driver market.
What have the challenges been for young driver telematics? Whilst many insurers and brokers have made an investment in harnessing telematics technology, many have underinvested in both the tools by which to effect behavioural change in their customers, and building appropriate operational processes for proactive risk management. Without these vital ingredients – both of which are the keys to extracting value from telematics data – UBI propositions are unlikely to deliver reduced claims frequency and in turn improved underwriting performance.
Having a relatively ‘light touch’ approach seemed to work to some degree while there was still material ‘self-selection’ benefit in the UK young driver market. Now that this effect has reduced due to a saturation of propositions and telematics policies the de facto choice for economic reasons, this has been exposed. Insurers who have backed the wrong brokers using the wrong tools and approach have seen sub-standard loss ratios and are now withdrawing their capacity as a result.
Yet to my mind these are perfect market conditions to justify the operational spend necessary to turn telematics data into lower loss ratios for insurers and lower premiums for customers.
So why are such a high proportion of insurers, reinsurers or capacity providers not taking advantage? Some can’t because of speed to market constraint, some stay away because premiums are too high while others have seen peers exit and without knowing the full story decide to stay risk averse and wait it out.
Telematics based insurance can be done well – we’ve proven that – but few have done it successfully, especially in the broker space where it is always tempting to focus on contact centre and claims handling expenses in the short term instead of the 70% of premium that covers indemnity, and costs capital providers money.
And maybe we Brits also focus on the failures more than the successes?
So what is the recipe for success? In truth it’s a simple 10/80/10 rule.
- Rapidly exit the 10% of high risk young drivers who frankly should not be on the road because they are not aware of hazards, are reckless, or increasingly distracted – and do it before they have an accident. Remember that fair, compliant cancellation mid-term needs human oversight, not just automated interventions – a little common sense needs to prevail at times
- Nudge the behaviour of the 80% of drivers who could be a little bit safer through targeted messages, coaching, and rewards – all delivered through their smartphone
- Keep the 10% of young drivers who are fantastic risks by giving them a great deal, and offer them a best-in-market price at renewal
What’s more, the right tools do exist to collect telematics data at low cost, deploy it effectively to reduce accident frequency and severity, and provide capacity providers with the evidence they need to see to know that it’s working. And there are some making it work, notably Aviva, and brokers of all sizes including iGo4, Ticker and Safely Insured.
They have been able to deliver on all three ingredients for success, and do it in a low cost way because the decision making and interaction with the customer is largely automated. It also provides the lead indicator MI to evidence that the interventions are working.
To be sure, the brand must have appetite to invest in the digital customer proposition, business processes, and the people needed to make effective use of the data. And dare I say it to pay a ‘quality premium’ for the telematics data and professional support services they should expect from their selected partner. Not all TSPs are created equal – choose one that operates at scale that has walked in your shoes and done the hard yards running a regulated direct-to-consumer telematics-based broker, and you’ll benefit from their experience.
For those that do, and those that are thinking of returning to this sector and following these principles, there is a fantastic opportunity to delight their customers, make money, and have capacity providers queueing up to back them with capacity. And, higher premiums make it likely that app-based telematics will appeal to the mass market, especially as the costs of the kit reduce.
Finally, the government can do a lot to help, by reducing insurance premium tax for telematics policies. Currently young drivers are disproportionately penalised by the tax, and there are social benefits from telematics (safer driving) which I’d like to see the Treasury encourage.
