COVID 19 and the cost of claims

In a report from insurance actuary Towers Willis Watson, a range of potential outcomes for personal lines and commercial motor insurers from the range of scenarios that could follow the release from lockdown have been modelled. The full report is available at the URL at the bottom of the page.

The report sets out a variety of scenarios related to the speed with which the UK government gets control of the COVID 19 epidemic and specifically on how quickly lockdown is relaxed and the likely impact on insurers and claims.

The scenarios range from "optimistic", in which it is assumed the lockdown lasts no more than three months, to "severe" where normality is at least a year away. A fourth scenario is also modelled where there is some success after three months lockdown but the risks to the economy are considered so great that a complete relaxation follows the three-month lockdown.

Of course, nobody has any idea which of the scenarios will eventuate, especially it seems the Government, but the devil is in the detail of the report. More significantly, the outcome does not really matter too much for insurers because they appear to win either way. In all circumstances, premiums will sustain, accident rates will be lower overall and loss ratios will improve.

Despite the current reduction in claims frequency of 50%, there are, however, some mixed blessings for those involved in processing accident claims, including claimant solicitors and CHOS, in any of the four scenarios.

Specifically, under any scenario, once the lockdown restrictions are lifted, it is predicted that there will be a surge in mileage above normal levels, which could negate some of the mileage reductions during the lockdown. In addition, that mileage will be largely generated by younger drivers and that has a positive impact on accident frequency.

One thing that insurers are forecast to be heavily impacted by, however, is the costs associated with settling third party claims which highlights why they have taken the assertive actions they have in an attempt to compel accident victims not to hire and persuade CHOs to allow them to intervene.  Staffing levels at insurers and repairers is reduced; there are challenges with sourcing parts, particularly from abroad; there is a reduction in the availability of claimant solicitors to bring and progress injury claims and the availability of courts to hear disputes will be largely unknown beyond the end of this year. These effects are all predicted to result in delays in settlement that will result in higher claims severity with increased credit hire duration but, more generally, longer settlement times tending to result in higher claims cost for insurers.

In the range of scenarios modelled, it is forecast that in respect of private motorists, mileage will be down by 75% during lockdown but in the three months after the lockdown driving levels will revert to 20% above normal. Claim settlement delays will result in higher severities during the lockdown, which means total claims cost faced by insurers in 2020 will be between 3% and 29% lower than without COVID-19. In addition, there will be many policy cancellations during lock-down, although these policies will re-incept once the lockdown is lifted. Total personal lines motor insurance premium for 2020 is forecast to be between 1% and 6% less than without COVID-19.

In terms of commercial motorists, mileage is down by 40% during the lockdown. In the three months afterwards, driving levels are forecast to be 10% above normal. In total the mileage for 2020 is predicted to be between 3% and 10% lower than without COVID-19.

Higher claim severities are predicted due to claim settlement delays and there is also forecast to be an increase in some risk factors such as businesses hiring inexperienced drivers or lowering of risk management standards. The combined impact is forecast to produce a 2% reduction in total claims cost for 2020.

In addition, as a compulsory insurance product, there is always significant political scrutiny of the UK motor market. The scenario analysis suggests that there is a possibility that 2020 will see loss ratios markedly below the past few years. If this is the case, there may be calls to return some of these profits to policyholders directly or via a windfall tax..n a time of great uncertainty where behaviours that they thought they understood are rapidly changing.

In addition, as a compulsory insurance product there is always a significant political scrutiny of the UK motor market. The scenario analysis suggests that there is a possibility that 2020 will see loss ratios markedly below the past few years. If this is the case, there may be calls to return some of these profits to policyholders directly or via a windfall tax.

Other predicted impacts on UK motor are that there may be an increase in uninsured driving as people cannot afford the premiums, especially if they are not able to drive a car much. This may include business use of private vehicles, for example, through an increase in delivery services during COVID-19. In addition, an economic recession following COVID-19 could increase fraudulent claims and theft of, and from, vehicles. It might also lead to an increase in the claiming culture within the UK as witnessed after the financial crisis in 2008.

Longer-term changes in behaviour could result from COVID-19 that impact the insured risks, for example, a reduction in commuting mileage as people get used to working from home or a speeding up of the transition to online shopping. However, for commercial motor, the report predicts that premiums will fall more than for personal with premiums for fleet policies, in particular, being adjusted for vehicle exposure and a higher cancellation rate where a business cannot operate under lockdown. Total premium for 2020 will be almost unchanged.

Access to Towers Willis Watson report is available here:

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