In the driving seat

A recent report on the UK motor market found that an analysis of the 2013 results of the majority of listed UK insurers indicated that the net combined ratio of the group will be around 101 percent, a 2.5 percent improvement on last year, and the best underwriting results in the sector since 2006.

However, the strong results depend on the referral fees ban delivering as intended and as there are already signs that this may not be the case, there are fears that insurers could face late submission of claims for the next three years.

“While referral fees themselves are banned, it looks like there are still ways in which customers can be encouraged to make claims, and that those encouraging them can receive payment in a form other than a referral fee,” says Catherine Barton, head of retail property & casualty actuarial, EMEIA at EY.

“Genuine claimants do of course need to be compensated, but the continued presence of manufactured claims in the market drives extra costs into the system, as well as increasing the number of claimants, which has a knock-on impact on premiums.”

In a sector which has been loss-making for the last 20 years and in which increasing levels of competition are putting pressure on premiums, which fell by 8.8 percent last year according to EY, the motor sector needs a revolutionary approach to increase profitability.

Tackling the issue

As fraudulent claims continue to rise, Barton says that the industry sees many late-reported claims for small injuries, which raises questions about whether they are genuine.

According to EY, the introduction of a medical panel in the coming months for small claims in the motor industry should help insurers better understand the high volume of complex injury claims

Premiums are also likely to be affected by the FCA’s proposed restructure of the £1 billion add-ons market, which is likely to reduce the take-up of these products by customers, which will ultimately increase prices.

“Autonomous vehicles should mean that insurers will be able to get a more comprehensive and detailed picture of risk, as well as benefiting from improved safety as the human error element of risk is reduced." Nick Beecroft

If the FCA’s proposal goes ahead, customers may move away from believing they should buy products that have been pre-selected for them. These products have been supporting insurers writing core products at lower prices for some time.

Another key factor to eliminating fraudulent claims is the potential introduction of driverless cars, which could reduce fraudulent claims or help them disappear almost entirely, explains David Powell of the Lloyd’s Market Association within Lloyd’s latest report: Autonomous Vehicles—Handing Over Control: Opportunities and Risks for Insurance.

“Autonomous vehicles should mean that insurers will be able to get a more comprehensive and detailed picture of risk, as well as benefiting from improved safety as the human error element of risk is reduced,” says Nick Beecroft, manager, emerging risks & research at Lloyd’s.

Trevor Marley, head underwriting, property and casualty—London says that the introduction of driverless cars could have a significant impact on the insurance industry for several reasons.

“According to estimates, 80 percent of all motor accidents are caused by human error. Also, in responding to a visual danger, a human can take several tenths of a second to react, whereas a computer needs only hundredths of a second,” he says.

“In 2012, the UK government road accident statistics showed that 195,723 people were injured as a result of road accidents. Out of these, 23,039 were serious injuries requiring a stay in hospital; 1,754 people were killed.”

However, the extent of change is difficult to predict. “The human intervention in accidents is not always the error of the driver, eg, someone stepping into the path of a vehicle, and even the much quicker reaction time of a computer cannot avoid all accidents. Computers themselves may fail to perform as intended or may be overridden, or there may be a sudden physical defect, such as a tyre burst,” says Marley.

While the safety of cars has improved substantially over a number of years, the severity of claims has continued to increase, so it seems that it may be the frequency of severe claims rather than the severity itself that will be affected.

However, as Marley explains, new technology may lead to increased severity. “It seems reasonable to assume that the driverless car technology will take advantage of concepts such as ‘road trains’ on motorways, where vehicles will be able to travel very close to the vehicle in front because their braking systems will be linked. A system failure in these circumstances could cause an accident and due to the high proximity of a number of other vehicles it could be severe and on a par with a rail accident,” he says.

The sector as a whole is likely to change in terms of pricing and data as things such as the characteristics of the driver become less relevant. However, as humans are required to drive less and less, this may also result in accidents as drivers become less skilled.

Regions are also going to vary widely in the use of these vehicles, with built-up areas the first to receive them.

“The take-up of driverless cars will vary from country to country although most manufacturers now offer vehicles on a worldwide basis,” says Marley. “Within a specific country, take-up is likely to be higher in populated areas where the environmental modelling needed for a driverless car is likely to be completed first, rather than in rural areas.”

Damage limitation

The technology for autonomous vehicles has already been put into practice in some areas—London’s Heathrow airport runs a system from one of its business car parks to Terminal 5. Here, the limitation is that it runs on its own dedicated track, so is not open to external factors, a fate that cars on the road cannot avoid.

Insurance industry expertise in risk management, mitigation, government influence, public trust and necessary licensing and legislation will all play a pivotal role.

Marley agrees. “It is not clear where legislation will go in this connection, eg, will it be decided that the owner or person using the vehicle will be responsible for accidents or will claims have to be made against vehicle manufacturers?” he says.

Lloyd’s says that where regulation and safety standards are yet to be developed, insurers can encourage prudent progress by making their own risk assessments and providing policies for responsible operators.

Lloyd’s underwriter Kiln is already insuring Unmanned Aerial Vehicle Systems (UAS), and is lending its expertise to regulatory discussions in the European Union aimed at gradually accommodating the new technology.

While Marley agrees that driverless vehicles would lead to fewer disputes as there should be an undisputed computer record of the events leading up to an accident, he says that they do pose a “very serious challenge” to the future strategy of the industry.

“A large proportion of non-life insurers write motor insurance. This is currently the single largest line of business in the UK with an estimated gross premium of some £14 billion. However, at a market level, it has also been one of the least profitable lines and so this is likely to be seen as both a threat and an opportunity,” he says.

While believing that driverless cars are likely to increase insurance uptake, Marley says that their integration is still a fair way off.

“Within the next 10 years we are likely to see driver assistance systems which will take over certain aspects of driving, for example, steering and speed, or both. Indications from vehicle manufacturers show that these systems will operate when the driving conditions are appropriate, for example, on a motorway. They will then switch back to the driver after a notice period (say 10 seconds). But I think it is important to keep in mind that the driver will still be needed.

“A fully automated driverless car that just carries passengers is already reality but with limitations. Fully driverless cars on the open road are probably a few years away from mass production.”