The Future of Risk: The Future of Motor Insurance in a Post-COVID World

The Future of Risk: The Future of Motor Insurance in a Post-COVID World

Article written by Andy Goldby, Chief Actuary

2020 was a difficult year globally as we all came to terms with the impact of COVID-19 on our health, and that of those around us.

In most countries, the authorities attempted to reduce the spread of the virus by limiting the number of people that could mix outside of their household, as well as closing entertainment venues, pubs, restaurants etc., and making it clear that working from home was advised wherever possible. Understandably, all of this had a significant impact on road travel across the world.

Travel bans meant that people could not leave their own country, but they also meant that travel within a country was extremely limited.

The COVID-driven impact on mobility

Overnight the workforce of many companies had to move to working from home and we all witnessed the significant reduction in traffic as a result. These drops in traffic were coupled with the associated increases in convictions for mobile phone use and speeding, as drivers reacted to the reduced traffic congestion where they were no longer limited by the actions of others on the road.

According to data collected by The Floow, in 2019, the average US and European telematics customers drove around 100 journeys per month. When the pandemic struck in March 2020, this dropped by 40% in the US, and by over 50% across Europe.

US average distance per journey and journeys per month

Europe average distance per journey and journeys per month

Since April 2020, the number of journeys per month and the average distance of each journey has recovered. But even by the end of the year, total average distance travelled per month was still down by around 15%, as many businesses remained closed or with the majority of their workforce still remote.

The challenge for insurers post-COVID

Most importantly, drivers are now more aware of the mileage that they typically drive, or rather what they used to do but don’t now. As a result, they have become more open to flexibly priced policies that meet their mobility needs.

However, this was not the only effect. McKinsey recently reported that, due to the challenges of face-to-face meetings, customer demand for digital products had increased from 38% to 54% within a couple of weeks of the COVID pandemic becoming widespread. In turn, this has increased the need for insurers to have a well thought out, multi-channel approach with a high-quality single view of the customer at its heart.

But there are even more challenges for insurers on the horizon as we move into 2021…

New legislative and technological changes in 2021

1. Increased penalties for mobile distraction

The Floow has evidenced that distraction through the use of a mobile phone whilst driving, especially physical interaction with the phone e.g. texting, is the most significant factor to increase a driver’s risk of having an accident.

Therefore it is very positive to see the UK Government recognising this increased risk, and broadening the legal penalties so that being caught holding or scrolling through a phone or sat nav whilst driving, will earn a driver 6 points and a £200 fine. However, for insurers, this means that a driver’s past history of convictions will no longer necessarily be a good guide for the future, and as a result pricing models will need to be adjusted.

2. Advances in vehicle autonomy

In addition, OEMs are making great strides in vehicle autonomy and ADAS features. So much so that in 2021, Automatic Lane Keeping Systems (ALKS) are on the road to approval in 60 countries via the harmonised agreements of the UNECE for ALKS type approval. Consequently, drivers will be able to delegate the speed and lane control of their vehicle to a computer at suitable speeds (including removing their hands from the steering wheel and/or feet from the pedals for extended periods of time), as long as the driver continues to pay attention to the road so they can retake control if required.

Again, this will lead to pressure on insurance pricing systems which will need to adjust without having a true understanding of which vehicles are fitted with these systems as an option, or indeed when and how often they are activated. However, many OEMs are seeking to reduce this ‘unknown’ factor by providing telematics data as an option directly from the vehicle.

At its most basic, this data may only be the total mileage the vehicle has travelled, but many OEMs may choose to offer detailed telematics data comprising of when and where various safety or ADAS features were enabled and/or triggered, as well as the customary 1Hz telematics positioning and speed data.

A good example of this is one OEM who we are working with. They are looking to provide a full VIN decoder which will enable insurers to understand exactly what ADAS systems are available in that vehicle (standard or optional) at the point of quote, as well as detailed UBI data for every journey.

3. Potential price optimisation changes

Lastly and most importantly, in the UK, the Financial Conduct Authority (FCA) is currently finalising a market conduct review into what they refer to as ‘pricewalking’. This is where renewing customers are likely to pay more than a potential customer would do if they asked for a quote.

It is extremely likely that the FCA review’s recommendations will be to, in effect, ban insurers from performing any form of price optimisation that uses tenure, or any form of proxy. This will mean that insurers will again need to do a significant review of their pricing systems and models. By the end of 2021, a factor, such as driving behaviour, could be one of the only remaining things that an insurer could legally use to differentiate prices at renewal.

All of these factors mentioned above, are combining to create a tidal wave of change which will catalyse the growth of telematics.

How insurers can utilise telematics to successfully navigate these challenges

We are already seeing many new UBI propositions coming to market, driven by growing customer acceptance of data sharing, as well as the need for flexible insurance products that can adapt to changing circumstances.

In particular, this is driving a wave of UBI 3.0 where a combination of mileage and high quality behavioural driving scores can be used to educate drivers to be safer and more efficient, saving themselves both time and money.