Saving $20 bln: Will Car Smart Systems Destroy Insurers
Following the train of thought of authors of a research by Swiss Re and Here to which FT.com and “Vedomosti”, are referring, the reduction of accidents will lead to shrinking of comprehensive insurance market because the traffic will become more safe, less people will want to spend on insurance and companies will be force to cut their rates. Researchers predict that insurance industry will lose $20 bln.
As far as Russia is concerned, this prediction does not reflect the reality and here’s why.
Comprehensive Insurance Market is Far From Being Overfilled
Introduction of new automotive technologies can indeed lead to some price reduction but it will primarily affect insurers from developed countries where comprehensive insurance penetration is high and surpasses 70%. It is not so in the developing countries. For example, comprehensive insurance penetration in Russia is less than 10%.
I.e. in the best case scenario only one in ten cars is insured. This means that there’s a huge space to build up clientele for insurance companies. That is why adoption of new technologies and slight reduction of rates will only make insurance more affordable ultimately leading to increase in number of clients. The total income in this case will generously cover the losses from price reduction. Currently the main obstacle on the way of comprehensive insurance penetration is the high cost of policies and reduction of their price will inevitably lead to a rapid ascend of the market.
Technologies allow insurance companies to find new loss-free clients.
One of the key tasks of every insurance company is not only to increase the number of clients but to reduce loss ratio, i.e. the volume of insurance payout to those who were in accidents. At the same time, currently there are not that many ways to assess the risk of working with a specific driver. In Russia insurers usually consider such factors as age, driving experience, car make and model, and, in some cases, insurance payout history.
The problem is that the combination of only these factors does not allow insurers to assess the risk properly. Many important aspects that may impact the probability of accident are neglected under this model. For instance, car usage, technical condition or driving style. It is obvious that a driver who makes multiple and long distance trips every day, including to unfamiliar locations, as compared to a person who uses the car for shopping on weekends, is far less attractive client for insurance company.
Using new technologies, for example, telematics system like Element by “Smart Driving Labs” that collects trip and car data will allow insurers to get a useful new tool in creating more complex and precise client scoring models. Large insurance companies have already added telematics products into their profile and mark their efficiency. Therefore they can offer customized rates to potentially loss-free clients.
And despite the fact that for such clients the price will be reduced, for those car owners with lowest total score the rates will only increase. All that will promote increase in loss-free clients and positively affect financial results of an insurance company.
New Tool to Keep Profitable Clients
If the situation on the insurance market will remain as is, then we’ll continue to witness permanent increase in comprehensive insurance rates because all insurance companies use the same screening factors to assess risks, so, ultimately, no one will be able to offer their clients better terms.
Continuous policy price increase has yet another disadvantage - it not only hinders increase in clientele but also promotes reduction in number of current loss-free clients of an insurance company. It is true, if a car owner is a careful driver and uses his/her car infrequently, has no history of accidents and does not demand payouts, in current situation his/her annual policy price is rather increasing than reducing. That is why those who purchased insurance once or twice will likely stop spending money on insurance policies.
On the other hand, accident-prone clients compensate the high cost of comprehensive insurance with payouts for accidents. And despite the increasing price after each accident they still understand all the risks and continue purchasing insurance from the same or any other company because it is still beneficial for them. Which is not the case for insurance company that incurs losses from such clients.
Policy price reduction for loss-free clients is possible only by introducing new rate factors into the existing scoring models. And getting additional data, like driving style, vehicle usage, etc., is possible by adopting telematics technologies.
Insurance companies will be able to forecast their financial yields more precisely.
All of the above has another positive ‘side effect’ for insurers. A large number of loss-free clients in company’s profile allows it to make more precise forecasts of their financial results. This model excludes any sudden rise of accident incidence rate with subsequent increase in insurance claims. In the environment of unstable economic situation such sharp and unpredictable changes may be critical for business.
In addition, the increase in number of car equipped with various safety systems (including anti-theft devices) will lead to reduction in percentage of insurance claim frauds. It is not possible to predict such illegal actions which creates additional risks to insurance companies. The development of technologies will substantially reduce number of frauds which, in its turn, will make financial forecasts much easier.
In the current economic environment of our country insurance companies need to increase business marginality. According to forecasts by “Expert RA” agency, in 2016 Russian car comprehensive insurance market will shrink by 9-12% while in worst case scenario the drop can be as high as 15-18%.
At the same time, conventional approach to risk assessment and calculation of insurance premiums does not allow companies to reduce comprehensive insurance rates, which makes them unfeasible to loss-free drivers that have no history of accidents or insurance claims. As a result, insurance company’s profile is full of accident-prone clients and they cannot reduce their rates.
And they find themselves in a catch 22 situation where in order to survive they need new clients but conventional approach prevents from attracting any. So, in order to develop insurance business needs adoption of new risk assessment and insurance premium calculation models. And in our case new automotive technologies are not a threat to the market, as argued by authors from Swiss Re and Here, but are the only remedy able to ensure its rise in the nearest future.
Only by adopting new tools like telematics insurance companies will be able to make their product cheaper, attract new loss-free clients and screen out accident-prone clients and, as a result, start earning more.