Over the last three months, The Floow has been monitoring the effects of the COVID-19 pandemic on mobility and motor exposure. As the lockdowns came into effect, we saw a huge drop in journeys being recorded, such as the 90% overnight drop which occurred in South Africa, and the slower initial response from the UK which eventually led to a 30% drop in journeys on 24th March, the day the lockdown was announced.
However, despite the fall in the number of journeys taking place, overall risk levels per mile driven were increasing as:
- relatively fewer trips were being taken on the safest roads
- some motorists were choosing to drive faster and more aggressively due to fewer vehicles on the road, and
- some drivers were becoming more distracted behind the wheel through the use of their mobile phones
Our data proved to be extremely useful for our insurance clients, and the market in general, to help insurance companies make fully informed decisions. Telematics data can provide a much-needed real-time view on what is happening as we move through these turbulent times and can help us avoid many pitfalls along the route.
Providing Assurance in an Uncertain World
We’ve now collated our findings from the past three months and combined these with our expertise and unique insights into driver risk and behaviour. We believe that there are three key areas of focus for insurance organisations when dealing with the uncertainty surrounding the COVID-19 pandemic on their understanding of mobility. These are:
- The effect on the underlying risk
- The effect on reserving
- The effect on customer demand
The Effect on the Underlying Risk
Telematics has long been used to improve motor profitability. Recording and understanding policyholder behaviour on a daily basis can make a big difference to an insurer’s level of understanding during a period of uncertainty. There are four key direct and indirect effects – Exposure, Behavioural and Contextual Risk, Fraud and Claims. Two of these effects are explored in more detail below:
- Exposure
We know that COVID-19 affected the number of people on the roads but to understand its effects on exposure, we need to look at mileage driven which can be measured via telematics.
The chart above looks across the last three months, from the beginning of March (pre-COVID lockdowns in many countries) to early June, and it shows that the mileage drop was significantly greater than the drops we saw in active users. So, alongside fewer people driving, those on the roads were also completing fewer trips, which were shorter on average.
Therefore, using a basic telematics policy or regular mileage verification, insurers can gain a good understanding of their exposure level on a daily, weekly or monthly basis.
- Behavioural and Contextual Risk
Fundamental shifts in a system can result in significant behaviour changes which can have a profound impact on overall risk levels. Due to COVID-19, many people stopped commuting, we have been able to observe the effects this has had on driver behaviour:
Time of Day: There has been a large drop in miles travelled during commuting hours and in the evening and early morning when people would be going out or coming home from social events. These trips were typically the most risky in terms of claims frequency and severity so this change has improved the book’s underlying performance.
Location: As lockdowns prevented people from moving too far from their home, we saw a larger proportion of journeys taking place on risky urban roads rather than on safer roads e.g. motorways. This contextual risk is larger than before, reducing the perceived benefit from a drop in trips or total miles.
Driver Behaviour: There is evidence that when traffic reduced, drivers who remained on the roads were able to drive faster and more aggressively whilst smartphone-based telematics, shows us that there has been an increase in mobile phone usage whilst driving which is highly correlated with an increase in accidents. These factors combined can have a significant effect on the actual risk level, leading to a pure mileage estimation being ~10% wrong.
The Effect on Reserving
The combination of the above could have a significant effect on reserve (and capital requirement) projections but we are not without precedent for this. Oddly, these ‘shock’ events seem to occur every decade:
- In 2000, petrol strikes in the UK led to a significant drop in mileage
- In 2010/11, the financial crisis saw petrol rise from 120p per litre to over 140p per litre which again led to reduced mileage
- In 2020, we have COVID-19…
The previous examples didn’t lead to the same scale of mileage drop but they provide an indication of how we can cope in terms of modelling.
Reduced Claims Reported: Reduced mileage exposure, even with increased risk per mile, will lead to a significant reduction in number of reported claims
Mix of Perils and Claim Size: Changing road usage, coupled with the economic downturn, will certainly have an impact on the mix of perils and likely average cost per claim
Increased Settlement Time: Changes in process have a significant effect on claims reserves as they affect claims development triangles used to project ultimate claims costs. These changes will be particularly extreme as many companies have been forced to change their working methods and there is also lockdown’s effect on suppliers, which is much harder to predict.
Looking to the future
Motor insurance predicts an individual’s relative risk through their age etc. and then basing the rate on desired profitability and expected claims inflation – which is where errors can arise as this is generally forecast using broad brush assumptions. Moving forward, we need to include socio-economic factors in these projections to avoid mis-forecasting 2021 and beyond due to an artificially low 2020.
The Effect on Customer Demand
Motor insurance is typically a grudge purchase which customers are forced to buy by law with many believing that they will never actually need it. As people are driving much less than usual, drivers and consumer groups have realised that motor insurers are in for a very profitable year as the premiums they have taken, based on expected mileage or predicted exposure from previous years, will be much less. As a result, this has led to interest in a number of options:
Premium Adjustments for Standard Policies
US consumer groups are calling for premium reductions and/or refunds as reported in Insurance Journal. Many US and UK insurers have provided their customers with monthly premium rebates and there are calls for this to be repeated each month based on the continued level of reduced risk. However, without accurately monitoring driving distance and behaviour, it is hard to create a truly fair way of rebating each customer.
Pure Pay-As-You-Drive
This could be used to monitor traditional policies and calculate the ‘correct’ rebate level for actual miles driven compared to estimated exposure. However, only monitoring mileage can lead to significant errors in understanding complete risk, and during COVID-19, this would likely have resulted in reduced profit, or even loss.
Pay-How-You-Drive
Our analysis shows that incorporating behavioural factors on top of mileage-based propositions can add in >25% to risk understanding for claims frequency and further 10% on average claim size. This can be applied to the insurer’s traditional book at an overall level to gain a leveraging effect.
To read our findings in full, download our report – ‘Telematics Benefits in Periods of Global Uncertainty’. If you’d like to have a more in-depth conversation about how The Floow can assist you in understanding these changes and reaping the benefits, please contact us at info@thefloow.com
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