Without wishing to tempt fate, we are getting to the other side of the pandemic. The changes in car use[i] and car sales over the past year[ii] is well-documented, and the motor insurance market will be keen to understand the impact on policy behaviour to support fair pricing. Fundamentally, insurance providers should want to know if a customer cancelled a policy or had a gap in cover possibly as a direct result of the U.K.’s three national lockdowns or may have done so for other reasons indicative of risky behaviour.
Clearly customers should not be penalised for exercising their legal right to cancel or disincentivised from switching, but the data shows that this behaviour does correlate with claims.
We know that from a pricing and underwriting standpoint, cancellations following the cooling off period, are a powerful factor in pricing given their direct correlation with insurance claims. Our analysis has shown that an individual who has had one mid-term cancellation in the past[iii], has a 35% higher loss cost relativity when compared to the market. At the other end of the scale, an individual with 6+ mid-term cancellations has a 230% higher loss cost relativity. Cancellations can also be costly from an administrative point of view and run the risk of bad debt if the premium is paid in instalments.
However, if an insurance provider identifies a cancellation or gap in cover as occurring during one of the U.K. lockdowns, then they may view the risk quite differently.
This distinction is now possible through the depth and breadth of motor policy history data that is held in LexisNexis® Policy Insights. Built on industry contributed policy data going back 6 years, from over 87% of the market, this point of quote data solution already helps predict motor claims losses and assess the risk of an individual based on their previous policy behaviour.
Knowing how vital it is for the market to understand policy behaviours that could be directly attributed to the pandemic, a new set of COVID-19 attributes has been created as a free enhancement to Policy Insights to help insurance providers identify at speed, at the point of quote, those cancellations and gaps in cover that occurred during the national COVID-19 lockdowns, versus those outside of that time.
This can help ensure that those individuals who chose to cancel their motor insurance or allowed their insurance to lapse during the COVID-19 lockdown period, are priced fairly when they next shop for insurance, renew their policy or make a mid-term adjustment.
We have now reached a point when we better understand more about the extent of the motor insurance market’s disruption as a result of COVID-19.
Year-on-year analysis[iv] of renewals, switching, gaps in cover, cancellations and customers exiting the market has revealed both cancellations and gaps in cover are down year on year. One reason for this is that shopping behaviour is down, but it does also suggest that motor insurance is seen as essential by consumers, which simply heightens the importance of fair and accurate pricing by the market.
But while disruption to policy behaviour was limited and there was a global reduction in the overall number of insurance claims, the number of fraudulent motor claims increased by 50% in 2020 compared to 2019[v]. This underlines the value of data on cancellations and gap in cover at a granular level to help alert insurance providers to potential fraud risks.
The value of data sharing – whether it’s policy history data, claims or No Claims Discounts – cannot be overstated. Knowing more about the customer at a granular level, through this type of data enrichment at new business, renewal and claim supports fairer pricing, a better experience for the customer and allows for valuable insights around specific events so that the insurance sector is able to add context to the way it views risk.
James Burton, senior director, product management, for LexisNexis Risk Solutions
[i] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/981967/road-traffic-estimates-in-great-britain-2020.pdf [ii] https://media.smmt.co.uk/december-2020-new-car-registrations/