This article is by Rory Yates, Global Head of Strategy and leading SaaS Insurance Platform provider, EIS, and it looks at the impact that vehicle risk ratings will have on the market;
The only constant in insurance is change, and yet, the industry is often in a constant struggle when change does occur. This feels like a real contradiction in terms.
However, it’s completely understandable. Insurance continues to be built on the foundations of policy-centric, low-change-rate monoliths. Until recently, even new technology was built along the same lines. However, the most recent change to the way car insurance costs are calculated is going to need end-to-end adaptivity from the way risk is analyzed to the way it manifests as a product, and how it operates in people’s lives.
The latest change is a major overhaul that will affect buyers of brand-new cars specifically. The traditional insurance group ratings for new cars are to be replaced by a new scheme called ‘vehicle risk rating’.
Coming into effect for new cars registered after August 1, 2024, it aims to enforce assessment of five risk areas, providing individual category scores for performance, damageability, reparability, safety and security.
This means that unlike the old “group rating” system, which was set at the car’s launch, the new “vehicle risk rating” can go up and down over time, increasing or decreasing its insurance costs in the process.
This change has come about partly because of the shift in vehicle technology and the need for a more appropriate and relevant risk assessment model. This is because vehicles are shifting from predominantly mechanical and hardware-defined systems to complex software-defined systems. They’re connected, increasingly intelligent and many are already theoretically capable of reporting an insurance claim and its repair needs.
Currently drivers should expect to pay £995 for their car insurance, on average – the highest price ever in the UK – according to the latest index published by Confused.com.
These prices increased significantly during last year, making car insurance in some cases almost unaffordable for many people. Particularly if they have made a claim in recent years. Prices increased by an average of £366 (or 58%) in the past 12 months alone, according to the price comparison site.
Insurers will need to look at utilizing cutting-edge data analysis to create rating systems with the potential to offer a more precise and detailed assessment of vehicle risks. However, as ever, how this is derived in the product, explained to the customer and used to create value is absolutely key.
The main benefits to both parties is that it’s simplified and the categories easier to explain. For the insurer, it’s a more standardised model that addresses the vehicle as more of a risk focus than the person. This will start to allow for more price transparency, and eventually the hope that more risk mitigation services can be built around this new model.
Ultimately the immediate hope is that this will not only help insurers price premiums more accurately, but it could encourage manufacturers to consider insurance outcomes when designing vehicles and implementing technologies. Better collaboration between the two industries is long overdue.
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