“This sudden brake could cost more than an accident for car insurance companies”.
In uncertain times like these where most industries are facing the heat of slowing economy and trying to find a new normal, auto insurance companies are preparing to bite the bullet as well. Let us break it down to understand what the crisis means for auto insurance industry and how the topline and the bottom line get impacted. Also, how change in business strategy, innovation using technology, AI can help them in the short to long run.
Impact on Financial performance
Motor insurance market had witnessed a CAGR of 18% last year with total collected premiums crossing 60,000 Cr in FY 19. This upward-looking trend may not continue this year with travel restrictions and apprehensions about public transport.
The combined ratio takes into account the claims paid and the expenses to determine the underwriting profitability of an insurer. CR has been hovering around 65% to 75% for the market leaders like Bajaj Allianz, Bharti AXA.
Loss Ratio – Now with the COVID travel restrictions, in the short term i.e. Q2 2020 companies can expect lower claim frequencies & intensity owing to fewer trips and kilometers in combination with lesser traffic. While this seems to be positive for now, the premiums will be impacted in the long term as the auto industry is grappling with manufacturing, sales and demand. SIAM, the trade body representing leading players like Suzuki, Tata Motors, Mahindra etc. has already projected a decline of car sales by 45% if the economy shrinks by 2%.
Also, the sales would come from the burgeoning pool of first-time drivers purchasing entry-level cars more as a safety measure. Similarly, certain customer segments might not renew the policy and even if they do so they might choose only mandatory third party cover or not renew secondary car policy, which could lead to shrinkage in the topline. Hence, the benefit gained from lower claims would be all offset by the premium shortfall and lead to an overall increase in loss ratio.
Expense Ratio – On one side the operating cost related to policy level expenses like underwriting expenses, broker commissions and other expenses like executive travel, electricity, etc would be seen as a saving. However, the major part of fixed cost still remains the same, leading to an increase in cost per policy. This would drive the expense ratio to be higher than expected.
Profit Margin – Hence, the combined ratio projections can be expected to overshoot 100%, leaving very little margin for underwriting profit. Typically, P&C insurance firms compensate for this loss with the investment income and firms have enjoyed an ROE of about 15%. But, given the plunging market scenario, the investment profile doesn’t look profitable.
With the hampering of new policies written, there is a crucial need to work smarter, deliver faster and engage better for ensuring customer retention. In the developed markets, State farm & Liberty mutual are refunding premiums to the customers as a part of stay-home programs. Even in India, new-gen companies like Acko insurance is offering 1 month added to the customers.
Customer education for maintaining a car which is lying idle in the garage and tips to keep it in a serviceable condition also plays an important role. Not just enriching the customer experience, this would mean lower claims due to unforeseen repairs.
While the need for extended covers may not be required and simple coverage like safe-shelter programs (run by Allstate, GEICO, etc.) can be the need of the hour. IRDA product approval can be simplified to ensure the go-to-market time for any product changes can be less. This can give room for innovation for companies also customers reaping benefit from the same.
Using technology and AI to be future-ready
The need for technology in auto insurance space is felt during rough times like COVID as any other industry right now. Companies should align their long term strategy to invest in the space of cloud computing, RPA, Telematics, etc. While the cloud can help cut down CapEx in terms of IT infrastructure, RPA can help in speeding up the claim process and hence reducing the OpEx. With the advances made in computer vision algorithms settling of the claim can be done with less manual intervention and fraud can be kept at check.
Currently, in India, only commercial vehicles have a mandate to install a GPS system. However, if this is expanded to the consumer segment, it will be easy to implement exposure-based pricing (pay-as-you-drive) instead of fixed tenure. Also, it can aid track vehicles to reduce theft. The studies of Telematics usage in the developed countries have proven that overall the technology has improved in road safety and lower accident rates.