Tag Archives: BIBA

Thoughts on Insurance After Brexit

On the day after the U.K. referendum voted to leave the European Union, a leading U.K. newspaper ran a cartoon with the caption, “Democracy is too important to be left to the people.” Of course, it was tongue in cheek, but the point was well made. Since the vote, markets globally have tumbled, shares in financial institutions have fallen, some as much as a third, the U.K. has “lost” Prime Minster Cameron and some are already seeing this referendum as the first sign of the breakup of the European Union.

In my blog of Feb. 29, “What Happens if U.K. Exists the E.U.?“, I suggested that, for the insurance industry, nothing good would come of the U.K. leaving Europe. I wasn’t alone in that thinking. In the days immediately before the vote, 20 European insurance institutes signed a letter asking that the U.K. not leave. The U.K.-based institute of brokers BIBA urged its members to vote to remain. Surveys of U.K.-based insurance executives showed almost universal agreement to stay.

But everyone was allowed to vote, not just insurance professions. The results showed massive division between different parts of the country, and even directly within families, with the agenda dictated ultimately by three key aspects: the economy; sovereignty and immigration. Some are currently arguing that the third factor, immigration, was the most persuasive and divisive – but in fairness they do a disservice to the complexity of the arguments.

In my lifetime, this event is outstanding in that almost everyone had a point of view, and in many cases were prepared to vocalize it. One madman even exercised his democratic freedom by murdering a member of the U.K. Parliament on the other side of the issue. Overall, it was a dirty campaign that, if anything, has undermined the public’s trust in our public representatives.

The challenge really rested with the bilateral nature of the decision. You were either Remain or Leave. There was no halfway house or room for indecision.

And then the results came in. And chaos was unleashed. The philosopher and statistician Nassim Taleb talks about “black swans” – events of low probability but maximum impact – and many are saying that this is one of them. His 2007 book Black Swans – Coping With the Improbable suggests that many financial services organizations are simply not prepared to cope with losses beyond what they have predicted in their models.

But this isn’t entirely true. One major U.K.-based global insurer has already said that, despite its stock value falling by 25%, it has adequately stress tested its business. I really hope that it represents the wider U.K.-based insurance industry, as opposed to being a one-off. Even so, asset managers are already actively reviewing their portfolios, and there will inevitably be a number of knock-on effects.

What all this means for the man in the street remains uncertain. In a saturated market, suffering from overcapacity, will the “leave” vote affect insurance premiums and, if so, in what way? There is already a threat of increased taxation, and it’s unlikely that the insurance industry will remain unscathed. How the major global insurers based in mainland Europe will respond to the U.K. “issue” will also make interesting viewing.

The fall in value of U.K.-based insurers coupled with the weaker pound sterling will make some U.K. insurers extremely vulnerable to predators, especially those keen to gain a foothold in the Northern hemisphere. Do not be surprised by some M&A activity in the coming months.

At the end of the day, despite all the uncertainty, this is an industry – and a country –that is characterized by resilience. For those working in it, and living in it, we have to be honest and recognize that there are likely to be difficult times ahead. But whatever we think of the vote, the essence of how we choose to live in the U.K. (and the Western world) is in respecting the will of the people. Let’s just get on with it.

Is Usage-Based Insurance a Bubble?

In May 2015, the British Insurance Brokers Association (BIBA) released research showing the figures of usage-based insurance (UBI) in the UK. The research showed that the number of live UBI policies is just under 323,000, which represents only 9% growth from 296,000 UBI policies in December 2013. That figure is well down from the annual growth in 2013 of 64%, and of 80% in 2012. The decline could be understood if the market had reached its apogee, but the market is far from that. Another piece of research shows that the penetration rate of UBI in the UK is only 3% of the total.

The UK is considered to be a mature market for UBI, and the figures in other mature countries are not different. In other countries, even in most developed Western European countries such as Germany, Netherlands, Belgium, Austria and Scandinavia, the penetration of UBI is much lower.

If one can measure risk factors — certain road types, road environment, time of the day, days of the week and driver behavior– it is possible to assess high risks. Telematics enables insurers to assess their risk much better than the traditional proxies, and we could expect much higher adoption of insurance telematics.

So, why it is not the case? Why hasn’t UBI fulfilled the expectations?

UBI BENEFITS

So much has been spoken and presented in telematics conferences about the benefits and value of UBI for both the consumers and the insurers. Just to mention a few:

For the insurance company:

  1. Better assessment of the risk, enabling appropriate pricing
  2. Self-selection of “good” drivers
  3. Attracting safe drivers from the competitors
  4. Developing and strengthening direct relationship between the insurer and its customers
  5. Lowering the risk by advising the customer to drive safer

For the insurant:

  1. Discounted premium (for “good” drivers)
  2. Safer driving
  3. Geo-fencing tools and young-driver monitoring

Let’s examine honestly –

  • Do the above benefits “work” in reality?
  • Does UBI provide enough value to the customer to attract her to be connected and give up privacy?
  • Does UBI provide enough value to the insurer and justify the high investment?

We have to admit that the answer to all those questions is “No.” In other words, it seems that the current business model of UBI is wrong. Neither the insurant nor the insurer gets enough value to make UBI mainstream and a success story.

Let’s imagine a utopian scenario, where 100% of the customers agree to be “connected.” Could the insurer monetize that connection? Could the insurer return the investment it made in telematics (capital expenditures and operating expenses)? The answer is probably “No.” As long as the insurer has to encourage “good” drivers through premium discounts, and is unable to reject or levy a surcharge on “bad” drivers, the insurer cannot see the ROI. We heard voices from several insurers about surcharges for risky drivers, but it doesn’t work in reality. Those customers will simply churn to the competition.

As for the customer, discounted premium was not proven to be strong enough to “connect” customers and get them to give up their privacy.

IS UBI A BUBBLE?

The above draws a gloomy picture. However, the fact is that we see more and more conferences around UBI and new vendors joining the game. Is it a bubble that is about to explode?

Not necessarily, but there is a need for a radical change in the business model.

The connected car is much more than UBI. Therefore, the existing model where the insurer collects the driving data, owns it and uses it for insurance purposes only (underwriting, marketing and claims management) is completely wrong. The insurer cannot see the entire picture of connected car services, and, honestly, most of the insurers are not interested in more than insurance.

So, what is the right way to make the connected car a success story, and UBI part of that success?

KEEPING THE CUSTOMER ENGAGED

To encourage dolphins to do their show, you must feed them with fish continuously. The same is with customers – if you’ll pardon the analogy. You must keep them engaged and provide them monetary value on a daily basis, so they will be intrigued enough to be “connected.” A very good example is the “rewarding” method of Wejo, where a customer collects miles and good scoring and can redeem it for free coffee, car wash, etc. When a customer feels that he gets real value, he is more likely to give up privacy.

UBI AS PART OF A BROADER SUIT OF TELEMATICS SERVICES

Insurers that offer additional services, such as roadside assistance and extended car warranty, can use the telematics device in those services. In that case, insurers can either cover the costs by the customer or spread the cost over the several uses and justify the investment.

A WINNING ECOSYSTEM

As mentioned above, insurance companies cannot see the entire connected car picture and therefore are not the ideal entity to collect and own the driving data. Moreover, as long as they cannot reject or levy a surcharge on “bad” drivers, why would insurance companies fund telematics (devices, connectivity, device management, data analytics) for those customers, if they can purchase a database of “good” drivers from a third party?

Therefore, we can expect in the near future to see the rise of telematics facilitators/aggregators that will collect data from the vehicle and own it, providing value and engagement to the customer and forming a winning ecosystem of multiple players that can benefit from telematics data and insight. Once they have a mass amount of data, they will be able to driver behavior analytics and monetize it for insurance companies.

What will be the profile of such facilitators/aggregators? Obviously, OEMs can play this role for embedded OEM devices. In the aftermarket telematics, we already see some cellular operators that are heavily involved in the connected car space, and we can expect more to come. Other optional players may be existing TSPs and UBI vendors that will see the potential in a multi-player game, as well as new entrepreneurs.

The bottom line is that UBI is here to stay, but its business model will radically change.