Motor insurers in the UK should look to other markets in the EU for ideas on how to develop more flexible products to help reduce the rising cost of cover for their customers
Motor insurance is the most popular insurance product in Europe with a market value of around 123.5bn ($138.97bn): 27% of non-life premium income in the EU is generated by motor insurance. Across Europe motor insurance rates have risen approximately 5% since 2009. The average motor premium is 221 per capita and average claims paid is 170 per capita across the region.
However, for such a standard product, there are significant differences across individual European countries in the structure of product, the way it is distributed and the way in which it is regulated.
This can be challenging, particularly for multinational insurers looking to operate in the EU motor insurance market. It means they cannot rely on basic assumptions about how motor insurance should work, because the differences in individual countries across the EU pose very specific challenges when it comes to designing the technology platforms to support the underwriting of motor business across different markets.
But there is also another dimension that is particularly relevant to motor insurers in the UK, where legislative changes are a big issue at the moment and where policyholders are faced with the near-certain prospect of rising motor premiums as a result of the new Ogden rate.
This will put huge pressure on UK insurers to develop new products that will give customers greater flexibility to reduce the cost of their motor insurance. In this regard, they could do worse than look to other European markets, which, as a result of different pressures, have had to address some of the same challenges motor insurers in the UK are now facing.
They will, however, have to take care a good idea does not get lost in the legislative and cultural translation between different market environments and becomes a bad idea.
Insuring the vehicle
Let us begin with some the differences between the UK motor insurance market and other markets in the EU. In Poland, for example, vehicle insurance is assigned specifically to the vehicle rather than to the driver of the vehicle. In this regard, it can be compared to an MOT certificate in the UK; so there is, for example, the possibility to buy a used vehicle with, say, five months’ insurance left on it. Interestingly, there is a bill being pushed through the Polish parliament at present where politicians are looking at the option of deregistering the vehicle for a set period during the term of the policy.
The bill would allow the policyholder to put the policy on hold for, say, two months and the insurer would be obliged by law to accept and reduce the premium for that period by at least 95%. This would be an attractive option for a customer who knows they will not be using their vehicle for a set time period because, for example, it is undergoing extensive repairs or because the customer is leaving the country for a while.
Things also work differently at the other end of the insurance value chain: with claims, for example. In Belgium the insurer is obliged to pay out on any claim immediately, irrespective of whether its policyholder was responsible for the accident or not. The insurer can then seek to claim damages from the appropriate party (typically the insurer of the other party involved in the accident) retrospectively. It means insurers systems and platforms need to be automated and integrated into the systems and the platforms of other insurers in the market, as the settling of such cases is pretty much a day-to-day, high-volume, process.
In Germany motor policies can be taken out for any period between one and five years. But policyholders can also avail themselves of a shorter, seasonal option which allows the insured to obtain cover for part of the year, for example, insuring a vehicle for just the summer months of May to September. However, the vehicle is not just insured, but it is also licensed only for that period and cannot be used for the rest of the year.
There is also an option in the German motor market to register multiple vehicles to one licence plate and insure them together, which allows the insured to save on premiums as they pay the rate for only the highest-premium vehicle, but have the option of driving several vehicles (albeit only one vehicle at a time) by using an interchangeable licence plate.
This solution was adapted from motor insurance products in Austria and Switzerland. However, the German government made one important change, which seems trivial but made this solution much less popular: in Austria and Switzerland you only pay insurance tax on the highest-priced vehicle. In Germany you pay tax on all the vehicles, even though you only drive one at a time. For many commentators, this is an example of a good idea getting lost in the legislative translation between different EU countries.
Across Europe, technology is the biggest disrupter in the motor insurance market. Companies are exploring the role driverless vehicles will play in the coming years, including the issue of fault in the case of claims involving a driverless vehicle and whether or not the individual motor companies will start to offer coverage. This issue will most likely be settled by market regulators. How remains the big question and, in case of the EU, whether it will be settled EU-wide or on a state level.
Learning from the UK
But European motor markets can also learn from the UK market (and they are learning fast), where telematics have been around for a few years, with the best examples saving policyholders 50% on their premium.
Telematics are becoming more common on the continent and in some markets developments in this area are outpacing the UK. For example, Italy is now the most advanced country in Europe (including the UK) in terms of pay as you drive policies, mainly as a result of its regulatory framework, which supports the roll out of telematics technology and insurance in the country.
When a motor insurance policy is purchased in Italy, the broker or insurer is obliged by law to offer customers the choice of a traditional policy or a telematics policy. This has played well with policyholders and has dramatically driven up the number of telematic policies (around 4.5 million) in the market. The consequences for the insurance industry has been positive. The frequency of claims among telematics policyholders is 20% lower than for traditional policy holders.
However, in other countries such as Poland, the first telematic schemes have only entered the market recently and are still treated as a curiosity by the customers. There are, however, huge hopes for telematics in Poland, with early projections suggesting telematic policies could account for up to 30% of the market in the not-too-distant future.
So, in summary, a relatively straightforward product such as motor insurance can be very differently structured between different EU markets. Directives such as the Motor Third-Party Liability Directive help to create a common standard across the region. The key considerations for motor insurers in the UK and elsewhere in the EU will be a flexible and integrated IT infrastructure, the ability to study and learn from other markets, the courage to innovate and to engage with new partners and technologies and last, but not least, the ability to adjust quickly to regulatory change.
Grzegorz Podlesny, Sollers Consulting
Originally published in Insurance Day, UK