Changes in vehicle technology and traffic conditions and new driver distractions affect the already fragile balance in insurer motor portfolios. In highly competitive markets, a shift toward, for example, higher repair costs for fender benders can turn a healthy portfolio into a product manager's nightmare. So as an insurer, what can you do to make your portfolio more resilient? Increasing premiums is possible but only to a limited extent. It is my strong belief that, in the end, it is in everybody's interest that insurance companies take a more active role in controlling accident rates and reducing the frequency and impact of road accidents, with broad benefits to our society in terms of traffic safety while at the same time improving portfolio returns.
About the limitations of road safety regulations
Why is this relevant for insurers? Isn't it foremost the role of governments to manage road safety and reduce accidents? In principle, yes, but there are a number of issues:
- It may take a lot of time to respond to today's fast-paced developments with new policies and regulations. For instance, in a state like Utah, reducing the permissible alcohol consumption limit while driving has shown significant improvements in accidental fatality rates. The Utah bill was passed in early 2017, but it took the state over 20 months to bring it to implementation. So we're talking years and sometimes decades.
- If there are no real-time, contextual data available, actual regulations may not accurately reflect the nature of specific accident causes. Take the Vision Zero Model: Initially implemented in Scandinavia, this program focused on redesigning high-crash zones. This has caused fatality rates to go down in 2018 and 2019. The change does, however, require detailed data collection.
- There are differences in the data provided by different organizations. NSC and CDC data provide partial views and are often inconsistent.
Surge in injuries and fatalities related to motor vehicles
In the U.S., over $177 billion was spent in 2018 by federal and state governments in constructing highways and public transit systems. Compared with this, the federal budget for running road-safety programs was $579 million in 2015. A huge number, even though it is only 3% of the construction budget. Yet the NSC notes a spike in pedestrian deaths in 2018 and concludes that 90% of accidents involving a car are caused due to human error, with over 57% of fatal crashes attributable to driving under the influence, speeding or distraction. Recent CDC data show a 20% uptick in fatality rates attributable to motor vehicle accidents, despite all public spending. So what are we missing?
America First also applies to road-crash deaths
Recent data show that incurred losses for auto insurance between 2015 and 2019 have increased by nearly 20% in liabilities and approximately 30% in physical damage claims for the private passenger auto segment.
While the physical claims increase can be attributed to the 17% jump in the price of hospital services, as tracked by the Consumer Price Index for the same period, the increase in liability rates is not explainable with the same reasoning. On the contrary: In the same period, the CPI for both new and used cars has gone down.
Something has led the U.S. to become the home to the highest number of road-crash deaths for any high-income country, and the number is over 50% higher than the nearest one reported by Western Europe, Canada, Australia and Japan. There is a piece of the puzzle missing that's required to bring these fatality rates down. One thing the data suggest: Whatever it is, it's unique and specific to the U.S.
Approaching the road safety problem from a different angle
Government-initiated measures are increasingly ineffective. Implementation is long, hard and expensive, and they don't seem to have a tangible impact. It's high time to complement these top-down approaches with bottom-up activities addressing behavioral change at the individual level -- for instance, by building reward mechanisms that consistently promote and reward safe driving behavior. Modern telematics solutions can provide the data to do that seamlessly.
A 360-degree view on traffic situations
While currently often being implemented to provide usage-based insurance (UBI) or pay-how-you-drive products, telematics encourages the individual driver's behavior to drive safely. Of key importance is the quality of the data. Earlier telematics initiatives were limited by ambiguity. Was the harsh braking a quick reaction to avoid an accident? Or was it dangerous behavior? Modern solutions have been designed to solve these limitations, by integrating different data streams to provide a 360-degree view on incidents.
The technology has a wide range of use cases. Addressing individual driver behavior, telematics provide insurance companies the opportunity to build new value propositions around claims reduction, safe driving, emergency response services or pay-per-mile offerings that are especially relevant in our COVID-9 reality, where lockdowns and working from home reduce overall mileage driven by commuters. Forward-thinking insurers can unleash all their creativity and innovation power to create engaging motor insurance solutions incorporating modern technology and services now that the underlying telematics technologies are maturing.
Capitalizing on granular traffic safety data
It is my firm belief that expanding existing road safety programs with sophisticated data-driven technologies will provide the basis for more effective strategies to be implemented. Onboarding and exploring the latest solutions and technologies is critical to remain effective. There is a big advantage: New solutions are increasingly easy to implement, providing no-regret learning scenarios to find the best use cases and roll out approaches quickly.
See also: Life Insurance’s New Occupation
Real-time contextual data is reducing ambiguity
Earlier telematic solutions may have provided partial data that did not always provide the full picture of what was going on, or required hardware solutions like dongles. The associated costs, complexities and limitations in data quality may have hampered well-meant, early business cases. The successfully scaling up of safety and prevention initiatives in combination with insurance is definitely not for the faint of heart, as I wrote in an earlier article on barriers for these initiatives.
The lesson here is not "We've tried, it didn't work, let's forget about it." Instead, these activities are much-needed stepping stones toward understanding what in fact does work. For decades, insurers have worked with sketchy, outdated, often unverified or unstructured data for their decision making, under the assumption that inadequate data are always better than no data at all. These days, we can increasingly leverage granular, real-time data from low-cost sensors, e.g. in mobile phones, that contribute to better risk pricing, early warnings for all kinds of hazards and automated claims processing. That is in itself a major improvement of existing insurance processes.
Actionable insights enable the transfer from managing policies to managing risks
There is another upside. With real-time, contextual data, we can present actionable insights to customers and partners in an intuitive, user-friendly, non-intrusive way. This is what I call the transformation from managing policies to managing risks. Why wait until something happens, when the technology and data are available to actually reduce the chance or impact of an unforeseen event? You might be able to start a PPM insurance project and gradually expand to more sophisticated features to nudge your policy holders toward safer driving habits.
Insurers have the opportunity to broaden their value proposition and solve customer engagement challenges at the same time.
