Turbulent times in auto insurance: keep both hands on the wheel!

Most auto insurers have probably already underwritten most of their 2023/2024 year-end policies in their policy management systems. Traditionally, this is a time for insurance company departments and product managers to take a deep breath, as they have faced some unusual challenges in recent years. This situation will continue to receive a lot of attention in the future. Let's take a look at the most important developments and the upcoming tasks from an auto insurance perspective.

The largest drop in earnings in over 20 years

During the coronavirus pandemic of 2020 and 2021, auto insurers in Germany posted record profits of several billion euros. This was mainly due to lower claims expenses, as many vehicles were used significantly less during this time. And people who don't drive generally don't file claims. However, insurers quickly found their celebratory mood fading in the years that followed. Claims expenses caused by crisis-related inflation and the resulting rise in costs for spare parts and hourly labor rates, as well as noticeably higher claims costs due to the increasing number of electric vehicles, led to massive losses that pulverized the profits of the pandemic years. In 2023, the earnings situation worsened dramatically once again, with the result that customers were now feeling the effects in their wallets at the turn of the year. The reinsurer GenRe recently calculated an average premium adjustment of +12.7% for new business premiums as of January 1, 2024. In the past, the specialist departments, actuaries and sales departments in the insurance companies were still fighting over every decimal point in the annual adjustment rates, but the percentage figure recently "rumbled" well into double-digit positive range. In the past, the two largest players in the market, HUK Coburg and Allianz, competed for the largest gains, but HUK lost more than 100,000 customers for the first time last year (source: HUK). This scenario was unthinkable just a few years ago. In the meantime, some auditing departments have even said that they want to deny auto insurance its reason for existing, due to the earnings situation. With a combined ratio (claims cost ratio) of 110% or a loss of around 2.9 billion euros (source GDV) for 2023, this is not surprising. As the saying goes: "From a profit perspective, every motor vehicle risk is one risk too many." A reduction in claims expenses is currently not on the horizon. This leaves two options: additional premium adjustments and/or a reduction in the cost burden. There is another recent development that shows that this situation should not be approached lightly.

Suddenly, there is also a lack of adequate service

While consumers did not exactly appreciate the recent necessary premium adjustments, a number of major surprises have now also emerged in the service and claims area, so that even the supervisory authority Bafin has been called into action. Many insurers, including HUK Coburg, the market leader and a known monster in procedural efficiency, have come under public criticism for their low expense ratios and outrageous customer service. Customers have increasingly complained about endless queues and long processing times. HUK itself confirmed this some of these criticisms and also referred to strained staff capacities, among other things. "There are major differences in performance between the individual organizational units," the Süddeutsche Zeitung recently quoted from an internal HUK event. Rarely have industry leaders made such clear statements in the past. And yet we are only just seeing the beginning of the problems caused by demographic change. The German Federal Statistical Office expects the proportion of the working population to fall by around 5 percentage points to just under 60% between 2025 and 2040. Everyone involved is aware that this gap can only be filled by greatly expanding the automation of processes, e.g. through the use of artificial intelligence. But whether insurers IT systems are capable of doing this is another matter. Enormous reorganization and investment in IT systems will certainly be required to address this issue in the future. However, these things are not only essential from a process perspective, they also have an impact on insurers' business models and products.

Data is the key

With the EU Data Act, which was passed in Brussels at the end of 2023, many auto insurers are hoping to finally get their hands on a huge treasure trove - their customers' data. The law clearly stipulates that users have sole sovereignty over their data and may pass it on as they wish. Of course, this also applies in particular to data that vehicles collect while driving and already pass on to auto manufacturers. How this data is now transferred from the manufacturers to third parties, e.g. to auto insurers, is still unclear and certainly still a major industry-wide challenge. But the effort to obtain this data well worth it. With vehicle data, insurers have the opportunity to radically adapt their processes to the needs of their customers. For example, sensors in the vehicle automatically detect an accident and how severe it is. The insurer can now initiate the claims settlement process ad hoc and send a tow truck and perhaps even a rental car directly to the customer. Vehicle data also offers tremendous added value when setting rates. If the premium calculation for auto insurance in Germany is already very well-differentiated today, a single driver's individual driving data can further improve risk differentiation and go several levels deeper, and perhaps even replace risk differentiation completely. If so, this would make traditional pricing obsolete.

Automation, artificial intelligence, new processes, tailored customer service, data-supported pricing and the necessary reduction in costs in order to return to smoother sailing in terms of results. These are all issues that can only be tackled with a future-proof, constantly evolving and cost-efficient IT landscape.

It's all very exciting.

Would you like to find out how and why our software can make your insurance company more efficient? Then please contact our expert Karsten Schmitt at adesso insurance solutions.

Do you have any questions or comments? Then please leave us a comment.

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