By Ed Harrison, Principal at LCP
Better than expected claims experience in 2020 led to the market reducing average premiums through 2021 and into early 2022, as it responded to changes in driving behaviour.
At the same time, reserving data was becoming more distorted than ever before, making emerging trends hard to detect, and diminishing the effectiveness of the feedback loop between reserving and pricing.
What about driving habits now?
Driving habits never fully returned to normal. Private car miles appear to have stabilised at about 92% of the pre-covid average, but mileage of light goods vehicles (eg Amazon delivery vans) is now circa 8% higher than pre-covid.
There is also some evidence of a post-covid shift in the time of day that vehicles tend to be driven, with a slight reduction traffic volumes during rush-hour compared to pre-covid.
Inflation
Inflation is not a new challenge for the motor market. Average costs on damage claims have been increasing faster than CPI for many years. The emergence of high inflation has compounded existing challenges and led to: higher wages (relevant for labour costs); increased manufacturing and import costs for parts; and an increase in the value of second-hand vehicles to replace write offs.
On the injury side, the introduction of the Official Injury Claim portal in 2021 created reductions in both the frequency and average cost of small bodily injury claims, notably whiplash claims. These reforms initially appeared to be very effective at reducing costs, but there has been a recent reduction in the benefits following the 2023 Court of Appeal ruling on how mixed injuries (consisting of whiplash and another injury) should be treated.
Supply chain disruption and settlement slowdown
Perhaps the most challenging post-covid effect has been the market-wide lengthening of claims settlement times, which was recently highlighted by the Institute and Faculty of Actuaries’ Third Party Working Party.
Some of these increases have their origin in the post-Brexit slowdown in getting parts into the UK. These have been perpetuated by the fragility seen in the global supply chain post-covid and more recently as geopolitical tensions rise.
Longer settlement times can directly cause insurers to over-estimate the maturity of their claims stock and under-reserve. This in turn causes delays in responding to adverse experience with rate increases.
Longer lead-times to repair vehicles and settle claims also pushes up average costs. On third-party damage claims, the credit hire component can be more expensive than the vehicle-repair element. Longer repair times means drivers are in credit-hire courtesy cars for longer, increasing costs.
Market mix changes
The Covid pandemic, supply chain challenges, and the ongoing inflation / cost of living crisis have driven a pronounced drop in the number of new car registrations. This in turn means that the average age of vehicles on the road has increased since 2020.
Electric vehicles (EVs) make up an increasing proportion of new registrations, leading to further changes in the overall market footprint.
EVs carry a different risk profile to traditional petrol / diesel cars. For example, the cost of replacing damaged batteries is a high proportion of the overall vehicle cost and the technology to assess and repair batteries is still immature. This means even minor battery damage usually triggers a write off. Parts are often slower to source and not all garages service EVs, further exacerbating the settlement delays seen on traditional petrol or diesel cars.
Whilst insurers may opt not to underwrite EVs themselves, they still have third party exposure when their drivers hit them. This puts upward pressure on already-high third-party damage inflation.
So what next?
Significant rate increases in 2023 should go some way towards helping insurers address the poor performance that much of the market reported in 2022. However, the challenges reserving for motor business are greater than ever – and some insurers have left the market in response to the tough conditions. The inflationary outlook remains uncertain and a further change to the Ogden rate (the discount rate at which large injury claims are valued for the purposes of agreeing lump sum settlements) is just around the corner.
Insurers with stronger analytics processes in place, who can slice and dice the data to investigate and pinpoint emerging trends quickly, will be best placed to reserve accurately for their portfolios. Those who also create the strongest and fastest feedback loops from reserving into pricing / underwriting will be best placed to compete effectively in a challenging market.
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