Solving the Problem of Underwriting Losses in Auto Insurance
2020 saw a sharp increase in underwriting profits amid a reduction in driving that led to substantially fewer insurance claims in the pandemic year. But in 2021 as economies have recovered, competitive pricing forces and a return to historical claims frequency patterns are making this increased level of performance unsustainable.
According to Fitch Ratings, the declines in claims frequency were offset somewhat by increased claims severity of 8%-10% for physical damage and 12%-13% for bodily injury. Underwriters pointed that accidents were occurring at higher speeds in less crowded traffic conditions, with distracted driving as a major contributor to these severity trends. Further pricing pressure is expected due to recent operating success, and competition to retain policyholders. All of which will contribute to a reversion to pre-pandemic performance levels.
Hence 2021 onwards, a combination of more rampant price reductions with claims frequency returning to historical norms, and loss severity trends that fail to subside could lead to sharply weaker underwriting results. This was seen as recently as 2016 — a watershed year when the incurred underwriting losses grew by over 12%, year-on-year, and the industry statutory combined ratio reached 106%.
Auto insurance industry is looking at systemic changes
According to Deloitte’s Midyear 2021 US Insurance Outlook, most insurers have already pivoted to a growth strategy of doubling down on technology investments, engaging with customers remotely in order to drive further efficiencies, and enable longer-term business model upgrades.
According to the survey, the top two actions prioritized by responding insurers to support financial and operational stability over the next 12 months involved implementation of new technology — to enhance efficiency (70%), and to improve customer experience (68%). This sentiment is fueling more aggressive technology investment, with 68% of those surveyed planning to increase spending on data analytics (up from 49% in midyear 2020), 59% will increase spending on AI (up from 40%), and about 50% of respondents also plan to boost budgets for robotic process automation (up from 30%).
While taking up technological innovation by auto insurance companies becomes a mainstay, its impact on underwriting profits will come from three core areas and technological applications.
01 Integrating telematics for profitable and fair premiums
By ensuring accurate premiums, the probability of profitable underwriting goes up. The risk assessment at each insurance profile level has to be customized and made sensitive for speed monitoring, accelerating, braking & cornering, fatigue scores and distraction scores. To pull this data, telematics powered vehicle data sources are needed to engineer optimized underwriting decisions. A major offering of Roadzen’s mobility suite are its telematics products which not only track vehicle motion, but prevent accidents before they occur, thereby not just insuring risk but preventing risk through one the most advanced technologies.
02 Nudging behavioral change for incentivized driving
The frequency of claims needs to be controlled, or else any underwriting profitability achieved can easily erode. Behavioral changes can be made by integrating virtual assistance, AI, and real-time analytics. Auto insurers must offer an integrated platform that can plug voice or visual interface assistance and improve driver safety scores. A safer drive will also be a claim-free driver, and a profitable customer for the auto insurer. The ability to track and coach driving habits via integrated driver assistance systems can further enhance driving safety and provide sure shot way to manage risk.
03 Profitable retention through data analytics
To remain both competitive and profitable, many insurers likely need to also take a renewed look at their retention models. With a shrinking market and the high cost of acquiring new customers, forward-looking insurers should consider retention during the underwriting process by focusing on writing policies with a high lifetime value. Most personal auto applications can be completed accurately to deliver a bindable quote by using available data sources with minimal consumer input. And very often an application can be completed in a fraction of the time than delivering a quote currently takes. By independently validating information from the application and applying indicators, and predictive modeling earlier in the application process, the result can be lower cost of acquisition and improved financial results for an insurer, as well as a better customer experience for the applicant.