The motor insurance sector has been beset with high costs of acquisition, fraud and abuse in the vehicle repairer networks, little product innovation and immense pricing competition.
This has changed very little over the past decade, and meanwhile pressure has grown on insurers to examine the key issues, to find where they lost their way and to find solutions for the future. Most motor insurers turn towards cost control methods rather than risk selection methods to tide over this.
It’s worth thinking about the present market scenario of ‘growth at any cost’, to show the way to a future based on a more accurate assessment of risk of the individual, and risk management.
Business model caught between high costs of customer acquisition and claims
Historically there’s been a different operating model and a lack of control, particularly in respect of underwriting and acceptance of risk, which is one of the causes of the high claim ratio. This is a model that has exposed underwriters not only to doubtful risks but also to very high claim costs.
We can note that overall losses in general insurance in India rose by a further 26% in financial year 2017, even though motor third party premiums are regulated by Insurance Regulatory and Development Authority of India (IRDAI) and revised on an annual basis. The government-backed accident protection scheme Pradhan Mantri Suraksha Bima Yojana is also a loss-making proposition for general insurers with losses exceeding 200%. This means that for every Rs 100 collected as premiums, Rs 200 is paid out as claims.
High acquisition cost and soaring administration expenses contribute to an estimated one third of the expenses in motor insurance.
The agent networks continue to be the main sellers of this product and our LexisNexis Risk Solutions India Insurance Consumer Study* showed that two thirds of policies are still bought offline, through face-face-selling by agents, banks and motor dealerships.
This research also showed more online buying of motor insurance amongst younger consumers and in Metro cities*.
Meanwhile we know that growth in the automobile sector and growth in Internet use and online price checking are going to be important drivers in the coming years. Car production in India is forecast to triple between 2016 and 2021, reaching 10 million passenger cars per year.
Newer distribution channels like bancassurance, online distribution and non-bank financial companies meanwhile have begun widening the reach and reducing costs.
Innovation on the road ahead
Insurers here offer primarily two types of policies: the regulated third party-only policies, and comprehensive policies which offer insurance against damage to own vehicle along with motor third party. Motor own-damage is not sold separately. The tenor of the policies is for one-year, except in the two-wheeler segment where up to three-year policies are available.
In the recent market data private sector insurers accounted for a share of around 48% in gross direct premiums generated in the non-life insurance, while public sector companies garnered around 52%. Industry premiums are fairly evenly split between comprehensive motor and third-party motor.
Then consider that insurers pay approximately 8% of the premium as commissions in own-damage coverage, while no commission is paid against third party premium given the regulatory restrictions. For the most recent financial year, the regulated third party premium was actually lowered: by almost 10% for vehicles of less than 1,000 cc whilst the premium for vehicles above 1,000 cc was left unchanged.
For a mature insurance company, the underwriting losses tend to be offset by income from investment translating into net profits to the shareholders. But this is not a sustainable model, considering some changes coming through in the market.
Changes in vehicle use, more own-damage coverage, wider ownership and penetration of car use in the population are all going to mean greater demands on risk data of the driver, rather than just the model, make and characteristics of the vehicle.
The road ahead fraught with technology and data-driven decisions: Are we ready?
New-generation vehicles with Advanced Driver Assistance Systems (ADAS), sensors and expensive components are going to mean sharply rising repair costs, at least in the short-term and medium-term, on the road to fully connected cars.
One report estimated that the entire cost of spare parts for a modern vehicle is three to four times the original sale price. Such advanced intelligent vehicles require repairs and servicing through the approved repairer networks of the vehicle OEMs, another element which is going to pile on top of increasing claims costs and demands in the insurance workflow.
On the claims side of the insurance business, the lenient attitude of the courts, casual approach of insurance employees and the frequently high disability percentage in bodily injury claims continues to hit profitability. Currently relying on ‘after event’ manual claims triage means that the insurers are crying out for data solutions that bring evidence and clarity to fraud detection and the investigate system.
The connected vehicle and the prospect of driverless cars are still in the distant future for India. But in our conversations with motor insurers, we know that there is urgency to prepare for the immediate steps: faster, more automated processes, new products and sales structures with digitalisation, the aggregator websites and price shopping coming into the market.
Key drivers for motor insurance
- Gradual change in focus from asset-based pricing to risk-based pricing
- Improved data sharing on errant drivers and fraudulent stakeholders amongst insurers
- Make driving behaviour and past claim records an important rating parameter
- Continual improvement of third party rates
- Improving service and delivery, as a means to end customer churn, promoting overall consumer growth and trust
- Promoting the service and protection benefits of additional insurance cover.
Product innovation and responding to consumer needs is key to building customer trust. More data assets are now available to solve problems in underwriting and across the whole continuum of insurance. We at LexisNexis are proud that our services, working in motor insurance and other sectors of general insurance, are contributing towards more innovation in product design, distribution as well as risk underwriting.
*With KS&R, a global market research firm, LexisNexis Risk Solutions India carried out a comprehensive survey of 600 Indian consumers with health insurance policies, ages 25-54, across the socio-economic classifications A1/A2/B1/B2 and Metro cities/Tier I cities. Respondents included only those who made the final decision and purchased their motor insurance policy themselves in the past five years. Data reflects the population, based on weighting to the India Census. Survey dates: September 2017.
*Metro and Tier I cities defined as cities with 1 million-plus population and 100,000-plus population respectively (as per census data 2011).
Follow the link to the LexisNexis Risk Solutions India website to find out more about how we support insurers.