The latest developments across the P&C insurance industry regarding fraud, risk and compliance.
20 June 2016

Embedded technology in cars is pressuring the loss ratio of motor insurers

The loss ratio of motor insurers is rising and this is partly due to the amount of embedded technology in modern cars. While the number of claims has fallen over the past five years, the average amount per claim has grown rapidly over this same period.

Driving iPads

embedded-technology-driving-ipads-higher-loss-ratioThe growing amount of embedded technology is making car claims more expensive. Old cars mainly contain parts that are easily replaceable and at relatively low cost, but new models are equipped with so much technology that repairs are often pricy. Statistics reveal that modern cars can be looked upon as “driving iPads”: easy fixes do not exist anymore. Once someone gets involved in a situation that inflicts damage to the car, the claim amount is immediately high due to the necessary replacement of electronics. Especially plug-in (hybrid) cars and fully electrical vehicles can be seen as computers on wheels.

Due to the large portion of technology, cars are declared total loss earlier than before. In new vehicles electrical parts are often better integrated, and when a damage occurs a complete unit needs to be replaced rather than just one part. Also, electronics and integrated parts are usually produced by a specific manufacturer, which affects the cost of repair. Non-brand affiliated and cheaper car repair shops often need to ask for assistance from dealerships or licensed partners because they do not have the tools and knowledge themselves to restore the complex technology in the car.

Embedded technology attracting car thieves

Another threat related to embedded technology is theft. Many cars are equipped with factory built-in entertainment and navigation systems. While these expensive gadgets improve the driving experience and comfort, they also attract car thieves. At rapid pace, organized crime is finding its way into modern cars. Not only luxury vehicles are a target: less expensive models are also filled with saleable gear, such as airbags and entertainment kits. While theft damage to the car may appear to be a minimal claim, a single repair can easily add up to an amount somewhere between EUR 4.000,- and 8.000,-. This imposes large financial burdens on insurance companies.

Higher loss ratio motor insurers

embedded-technology-higher-loss-ratio-motor-insurersSeveral of these findings are based on a study in The Netherlands by European claims specialist CED. The average amount that motor insurers spend on claims and overhead, per euro of written premium, is EUR 1.09,- This gap in profitability leads to combined ratios over 100%. And because the motor insurance market is highly competitive, there is barely room to charge these costs to policy holders. Losses are increasing, while the number of filed claims is decreasing. CED points out that policy holders are showing safer driving behavior than before, but when an accident occurs the damage is greater. Statistics show that the number of motor claims has declined by 28% over the past five years. However, over the same period of time the average claims amount has risen by 15%. This is a huge concern to motor insurers.

Straight-through processing as a solution

Motor insurers are looking for ways to reduce costs. This is why investments in IT are growing. Many companies focus on straight-through processing (STP) as a solution to the increasing combined ratios. This enables insurers to automate and integrate as many steps as possible in the repair process, and minimize the number of contact moments. However, during the claim process it remains important to properly assess the risk related to claim. Insurers therefore often choose to integrate an automated fraud detection platform as part of the process to avoid the payout of fraudulent claims.

Sources: CED report “Moving forward in Mobility”FD

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