COVID-19 & AU Motor Insurance

COVID-19 restrictions in Australia have led to significant reductions in traffic and a lower number of motor insurance claims. We can expect that the motor insurance landscape will also change significantly in other ways due to the global pandemic.

Reductions in claim frequency

ongestion monitoring websites indicate a drop in congestion of approximately 50% in Sydney and Melbourne, and even larger drops of up to 60% in Adelaide, Canberra and Brisbane. In smaller metropolitan areas, the reduction in congestion has been less pronounced, but significant drops have been seen across the country. Mobility data shows a similar trend, with driving reduced by approximately 50% when compared with the beginning of the year.

By examining reduced traffic periods such as public holidays and using these as comparison points, we have been able to form an approximate relationship between traffic volumes and the frequency and cost of collision claims.

Based on this analysis, we believe that personal lines motor insurance in Australia can expect to see reductions in collision frequency of between 30 to 45% (noting that collision claims make up around 90% of total claims costs). Our analysis has also indicated that average claim sizes are unlikely to change materially due solely to a reduction in traffic volumes. However, pressures on average claim sizes will be felt as the result of a number of COVID-19 related economic headwinds expected in the short to medium term. We discuss these at length later in this article.

How have insurers reacted?

Around the world, some insurers are returning parts of the premium to customers to account for the lower levels of risk to which they are exposed.

• In Australia, Youi is running an opt-in scheme to return 15% of monthly premium across a three month period, while QBE is issuing vouchers worth $50 for their car insurance policyholders. Suncorp and IAG have also publicly announced a number of practical support programs that focus on vulnerable customers, or those experiencing financial hardship.

• In the US, at least 20 insurers are offering some degree of refund, typically between 15% and 25% of the premium for the affected period.

• In France, the insurer MAIF is returning €30 per vehicle.

• In the Hubei province of China, the Insurance Industry Association has required insurers to extend their motor policies by the period of the lockdown.

Media coverage and the examples set by these insurers’ leads to questions about whether other insurers should pass their savings on to customers. Many Australians have experienced financial hardship due to the global pandemic and would welcome premium relief.

All “publicly stated” discount programs involve a customer rebate or discount, rather than a premium freeze or reduction on renewal. In our view, the former provides immediate financial relief to the customer and does not flow through to earned premium in future financial years.

Other headwinds and considerations

It is crucial to make this decision with a view of the wider implications of COVID-19 on personal motor insurance, and with a focus on long-term financial stability. As discussed above, while claims frequency is likely to reduce in the short term, there are other consequences of the pandemic that may increase claim costs for insurers while the economy remains in shutdown (and also during a prolonged recovery). These factors include:

• Volume discounts that may apply between insurers and repairers no longer being honoured due to the significant reduction in number of repairs.

• Global supply chain issues leading to delays in the receiving of parts, resulting in increased hire car costs due to delays in repairs.

• The increased cost of vehicle sanitisation and preparation prior to repair.

• The increased difficulty in procuring recoveries, whether these be from uninsured third parties, lower excess recoveries as hardship provisions are applied, and lower salvage recoveries due to many salvage businesses closing temporarily.

• Exchange rate impacts on imported parts and new vehicles which are subject to the relative strength of the Australian dollar.

We estimate that in the short-term the combined impact of these factors could increase average collision costs by up to 10%, which when combined with the reduction in claims frequency brings the overall saving in (collision) cost per policy to 20-35% under current conditions. This would imply overall savings for the industry of between $85-150 million per month should lockdown conditions remain as they have in recent weeks.

Job losses and a weakening economy are also leading to fewer sales of new cars, which are an important source of new business for insurers. March figures show that 18% fewer new vehicles were sold in Australia in 2020 compared to 2019 . Reductions in income may also push customers from comprehensive products towards third party policies. In the short-term operating expenses for insurers will also have increased as staff and supplier arrangements are transitioned to a remote working environment. These trends are likely to continue with some becoming more pronounced in the coming months.

But there’s still more to come

COVID-19 will impact many facets of the personal motor insurance environment. While some are apparent now, such as a reduction in traffic and a corresponding reduction in claims, others will play out over the course of months to come. It is important to bear the totality of these changes in mind when making decisions about how best to support customers during this difficult time.

Furthermore, as we move into a period where COVID-19 infection rates indicate we’ve ‘flattened the curve’, the timing and magnitude of any lifting of restrictions and their impact on mobility should also be considered.

We will continue to share up-to-date information on the changes in claims patterns and other trends within personal lines motor as new data emerges. The health and economic challenges faced across the globe are impacting everyone, and we will endeavour to provide an understanding of the specific ways in which insurers are affected.