Looking back on a year in lockdown, and lessons learnt to navigate the future of motor insurance
As we mark the one-year anniversary of life in lockdown, it’s important to look back at not only how much life has changed in terms of restrictions, but also to look at the benefits that it has brought. We know that our private and professional lives have been forever altered but it’s important to establish a holistic overview of the situation to help us ascertain what the future holds beyond lockdown.
Adaptability and flexibility are key to survival, and this is especially true for the insurance industry. With this in mind, I’ve picked out some of the top trends that not only significantly changed almost overnight as a direct result of COVID but are expected to not ever return to ‘normal’ – for want of a better word. These are the areas where we must focus on how to adapt post-lockdown.
Motorists are doing less mileage, but insurers are profiting from fewer claims – something has to give
A contentious issue is that most motorists have significantly reduced their car usage, but this is often not reflected in their policy pricing, with many still paying the same or even more for the policies [1]. This has been a bone of contention for the best part of a year with no real resolution in sight. A few large insurers have given one-off refunds but there are calls for more to be done. As with everything lockdown-related, this issue is not as binary as it appears to be at face value.
Short-term profitability, longer-term loss prompts need for greater investment in digital innovation
According to EY’s report on UK Motor Insurance Results [2], COVID lockdowns and resultant reduction in motor claims saw costs fall by 12%, placing the Net Combined Ratio (NCR) for 2020 at a predicted 93.8%, a 7.2% improvement on 2019’s performance.
However, it did note that lockdowns are masking some of the sector’s underlying cost challenges and this year motor insurers will face the same repair inflation trends they have been contending with for years. What’s more, the Financial Conduct Authority’s (FCA) proposed pricing rules means higher costs for general insurers in 2021 as they make the necessary changes and balance the premiums offered to new and existing customers.
These factors are expected to squeeze profitability and push it back into the red in 2021. EY predicts that the Net Combined Ratio (NCR) for 2021 will be a loss making 103.7%.
Bearing this in mind, the report went on to state that in order to remain more competitive, it is becoming ever more critical that insurers look to differentiate their customer offerings by investing more in innovation and digital transformation.
The rise of the ‘pay-as-you-go’ insurance proposition
With passenger numbers on public transport also plummeting as a result of lockdown [3], remote workers are likely to expect their flexible working arrangements become more permanent. In fact, recent surveys of UK office workers showed that 72% of respondents said they expected to work remotely at least one day a week once offices reopened, with almost two thirds (65%) saying they expected to work remotely at least two days a week [4].
The Chartered Insurance Institute (CII) [5] notes that these shifts in consumer behaviour will ultimately have an impact on what customers want from their insurance products, citing ‘pay as you go’ insurance as an increasingly viable solution, where policies are usage-based and provide temporary cover that can be extended to borrowed vehicles for work purposes. Temporary policies include one day car insurance up to monthly car insurance, with hourly options also available for added flexibility.
Digitalisation of automotive retail
The automotive retail industry is still under immense pressure from lockdown restrictions, with physical dealership sites remaining closed and test drives banned. But in the face of this immense adversity, we witnessed the rise of the digital dealership, a concept that would have been unfathomable even just a year ago.
Cazoo was the first fully-digital platform to enter the vehicle dealership market in late 2019, and there has also been significant investment this year in new entrants such as Cinch, Carwow and Carzam. Traditional dealerships such as Arnold Clark, Cargiant and Motorpoint have extended the digital aspects of their purchase journeys with services including home delivery and Click and Collect as alternative options to the full show room experience.
Rise of digital driveway insurance policies
During the lockdown period, several forward-thinking national blue-chip dealerships (with both physical and digital showroom floors) have begun to offer fully-digital temporary driveaway insurance policies that cover the vehicle for a fixed-term, usually between five to seven days.
This takes the stress out of searching for annual insurance on the spot and provides the driver with near instant cover so that they can immediately drive their new car while giving them the opportunity to thoroughly research the best annual policy to suit their needs.
It’s also an ideal solution while the car is under its money-back warranty, as the driver does not have to commit to an annual policy on a car that might be returned. Another benefit is there’s no risk to any existing No Claims Discount, as it’s a separate and standalone policy.
Evolution of consumer behaviour and the growing need to enhance the customer experience
The insurance industry has an unenviable reputation of providing complicated policies that are obtained through a cumbersome and time-consuming process. For many customers this means a confusing and frustrating experience.
Even pre-COVID, there was a clear trend that brand loyalty was in decline, as modern day consumers are no longer prepared to remain blindly loyal to any company for a long-term period. Instead, they will reward businesses that offer a simple and convenient user experience at best value.
COVID accelerated this trend and many large insurers have struggled to adapt accordingly. Although the big insurers do as much as they can to ensure their customers feel valued, they continue to face a unique set of challenges in the current climate – most notably cumbersome legacy systems that can hamper the ability to quickly adjust to major environmental and market changes.
Alternatively, smaller and more agile InsurTech businesses have been able to offer more flexibility to customers in these unprecedented times. It goes without saying that this does not mean that the temporary usage-based car insurance proposition is positioned to replace the annual policy model.
Far from it, in fact. The temporary offering should be seen as a complementary add-on to an annual policy. To this end, it is becoming increasingly important that all insurers and brokers work more collaboratively to offer motorists the most flexible and fit-for-purpose solution at a fair and affordable price in a time where immense uncertainty is still the order of the day.