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European insurers are preparing for a new era in motor insurance. On January 24, Insurance Europe and the Association of Mutual Insurers (AMICE) launched the data4drivers campaign. They demand that data generated by semi-autonomous and autonomous cars should belong to drivers rather than car manufacturers. The petition is backed, among others, by the German Insurance Association GDV and the British ABI. Germany’s car manufacturers such as Mercedes-Benz, BMW and Volkswagen, as well as their suppliers such as Bosch and ZF, are investing heavily in technology for autonomous cars. Volvo recently announced that it is “fairly confident” it can start selling autonomous vehicles in 2021.
Starting in April this year, new cars sold in the EU must have a system called eCall. After an accident, this system is supposed to contact the emergency services. A major concern of German insurer HUK-Coburg is that manufacturers will use eCall to direct cars after an accident to the service stations of car manufacturers. With margins under pressure, car producers and their trading partners are eager to compensate with additional services in financing, insurance and repair. HUK-Coburg has a market share of 14.3% in the German motor insurance market. One of its key competitive advantages is a network of independent service stations, which allows the insurer to control claims costs. If damaged cars were directed to car manufacturers’ service stations, HUK-Coburg would lose control of claims costs.
Motor insurance pricing has reached its peak
At EU level, politicians seem to have forgotten the side effect of eCall, which is primarily intended to reduce the number of fatalities on the roads. Access to car data will be a major business opportunity. The Chinese insurtech ZhongAn is trying to enter the motor insurance business. It has presented a big data platform called Data Cube to create a data ecosystem in the industry and serve its vehicle-sector partners by sharing data with other insurers. The success of ZhongAn’s initiative will most probably depend on the support the Chinese government is willing to give. Data has become so important that it seems unlikely that any car producer would hand it over unless forced to do so.
Motor insurance has seen an upward trend in many markets, but it seems that the cycle has reached its peak. In January, German insurer HUK-Coburg announced that Allianz was putting pressure on the German motor market. This might be the beginning of a new price war. German motor insurers have seen two profitable years in a row, and in 2017 insurers again had good results, with a combined ratio of about 99.0% according to the German GDV. In the UK, motor insurance saw price increases of 9% last year, according to the Association of British Insurers (ABI). The government lowered the Ogden rate for discounting motor reserves to a record low of -0.75%. Motor insurers were forced to strengthen reserves, putting them under significant financial stress. They were therefore forced to demand much higher premiums than before.
With premiums rising, British insurers fear that motor insurance will become unaffordable and are campaigning to reduce claims costs. In January, ABI called on the government to reform the way whiplash claims are handled and demanded a freeze of the Insurance Premium Tax at 12%. Since 2014, motor premiums have risen by 29%, according to ABI. However, last year premiums rose at their slowest rate in recent years and even declined by 1.3% in the last quarter.
Scandinavian insurers look for cost-cutting opportunities
In Denmark, third-party liability motor premiums have been declining since 2007 and margins are becoming tighter every year. However, insurers manage to compensate with motor hull insurance, where premiums are increasing. The large insurance companies of Scandinavia had very good results in 2017, with combined ratios far below 90%. 2017 was a benign year on the claims side, but the large insurers also did a lot to lower their own expenditures. Danish Tryg operates with a cost ratio of 14%, Norwegian Gjensidige has a cost ratio of 15%, Finnish If has costs of 16.4% of premium income and Danish Topdanmark 16.1%.
Tryg does not see any possibility or necessity to cut costs even further. However, the Danish market leader intends to streamline its business. Last year, Tryg announced that it would acquire competitor Alka, a low-cost insurer. This transaction will take place this year. In Norway, Tryg acquired the insurtech Troll, which has won 12,000 clients in seven years but has made significant losses. Troll is a low-cost insurer which sells only via the Internet and offers an account to manage deductibles.
Insurers in Scandinavia are moving forward with digitalisation. They want to increase self-service by improving the usability and functionality of their client portals. Tryg calls its strategy “digital empowerment of the customer”. It has launched a low-cost insurtech called Undo in Denmark, which offers automated sales and claims services. Undo has just one customer touchpoint: the mobile phone. If this business model works, Tryg would launch a second enterprise in the Norwegian market. Digitalisation has been important over the last three years and will become even more important. Insurers have paid a lot of attention to customer satisfaction and feedback, with a particular focus on claims handling. Gjensidige implemented a super-fast claims handling mechanism. Now insurers plan to enhance their analytical skills, while Topdanmark is focusing strongly on automation and robotics.
Successful cooperation between insurers and insurtechs
Robotics is becoming popular in Germany too, where virtually every insurer is looking for a digital strategy. It is a common belief among German insurers that there will not be a sharp rise in direct sales and that the insurance business will be dominated by agents and brokers for a long time. Unlike in Scandinavia and the UK, direct sales have a market share far below 10% in Germany. However, salespeople are getting older and the number of agents is decreasing significantly. In January, there were 220,000 insurance salespeople registered in Germany. That was a decrease of 3.3% in one year. Since 2011, the German insurance industry has lost 43,000 salespeople and the number will shrink even further.
Trying to make insurance sales more efficient, German insurers are creating new portals for clients and agents and adding new functionalities to them. It has become popular to develop skills for Amazon’s voice assistant Alexa. Deutsche Familienversicherung was the first company to offer this, and Zurich Germany and D.A.S. UK followed, with many more expected.
Like their Scandinavian counterparts, German insurers are experimenting with automation tools and some are taking their first steps with artificial intelligence. Insurers have purchased insurtechs, and these collaborations are showing results. Basler-owned insurtech Friday has acquired 15,000 clients since its launch three months ago, while insurtech Element is close to making a major deal with football club Borussia Dortmund, offering private insurance to football fans. The insurtechs Clark and Friendsurance, a peer-to-peer insurtech which has changed its business model to an online broker, are approaching banks to gain better access to new clients. Bancassurance has until now been largely offline, and German banks have mostly cooperated with one insurer. With insurtech gaining a foothold, we can see how business models are changing in this sector too.
Run-off causes public outcry in Germany
In January, German market leader Allianz revealed more details of its plan to make its self-developed insurance core system ABS available to other insurers on an open-source platform. Allianz invites German insurers to co-develop the software and become part of a community. Allianz is implementing ABS in its subsidiaries all over the world, but not all of them welcome it. The open-source ABS is supposed to work like an app store, inviting software developers to add new service components. However, the actual introduction of ABS has caused significant problems at Allianz’s health insurance business, which currently has difficulties processing ongoing business. To help customers, Allianz introduced an online forum where clients can submit complaints and assistants can resolve the problems.
Insurance premiums went up by 1.7% last year in Germany according to the GDV, which was lower than GDP growth of 2.2%. P&C growth was strong at 2.9%, but life insurance was stagnating. Germany is underinsured in life insurance. Life insurers have given generous guarantees to their clients in the past. Now they are struggling to earn the money needed to meet these guarantees and have come under significant financial stress. Insurers are addressing their legacy business and the situation seems to be stabilising. However, recent moves by insurers to sell with-profit business to run-off providers have caused major public outrage in Germany. CDU politicians even threatened to prohibit these deals, and with the new government in power this threat might become real. German regulator BaFin is under political pressure and is granting permissions for run-off deals with stricter obligations. There has been another mid-sized deal with Frankfurter Leben, which belongs to the Chinese conglomerate Fosun. However, this type of deal will probably become more difficult in the future.