4 min read
Did you know that despite the seemingly increased number of cars on the road, car sales worldwide were predicted to actually fall in 2019? And not just by an insignificant number, but by a whopping 400 million!
To some, it might not seem to be a big deal at all, but to those in the insurance industry, a decrease in sales means an automatic decrease in insurance which is not fruitful for business in any way.
In this week’s blog, we take an in-depth look at how this slowdown of the automobile sector has impacted automobile insurance.
The motor industry in 2019
In July 2019, the UK motor industry reported a drop in sales for the 5th consecutive month. Registrations for cars fell to 157,198 which is a drop of 4.1%. This has been the steepest drop since July 2017 with the demand for new cars falling among both business and private buyers.*
Why the drop? A couple of reasons here:
Generational differences in transportation preferences
In stark contrast to the previous generations, millennials aren’t too fond or eager to ‘own’ their own cars. Travelling and lifestyles filled with freedom are what most millennials are after. Ridesharing apps like Uber, ViaVan, and Bolt have further encouraged this asset-free lifestyle and led to fewer walk-ins in car showrooms.
Hike in motor insurance premiums
Motor insurance premiums could also see a hike. The average costs could be hiked between £25 and £50 while for young drivers, the cost could go up by £50 and £75. This would increase the overall price of the car which would further negatively impact car sales.**
Environmental and safety regulations
Changes in safety regulations like car tax diesel and new MOT rules have also discouraged car sales especially of older models that do not meet the new.
Moreover, the global demand for diesel vehicles has drastically fallen after emissions cheating scandals. These had led to a ban on diesel in a few cities. Hence, while petrol sales rose, diesel sales dropped by 22% year-on-year.
Electric vehicles have been saving the day but they, too, are yet to be accepted in their full element. Battery vehicles represent only 1% of the total car sales. In the discouraging motor industry climate, this comes as a ray of hope but greater investment and infrastructure are needed on the government’s part to bump up sales.
The effect on insurance
Now, we all know how this relates to insurance.
When a person happily purchases a new vehicle, motor insurance is mandatory. This goes for both four-wheelers and two-wheelers. Thus, both sales and registration are captured this way. The insurance has to be renewed on an annual basis, too. So, once the sale is made, the purchase of insurance is also guaranteed.
As per the Society of Motor Manufacturers and Traders (SMMT), UK passenger car sales had further dropped by 6.7% to 143,251 units in October 2019.*** The luxury carmaker Aston Martin has gone so far as to blame the trading conditions in the UK and Europe for its £13m loss. With this drop in car sales, insurance sales have also gone down. This led to a decrease in revenue for insurance companies which has further created less wiggle room for any added fixed costs.
In June 2019, the consultancy firm EY predicted that motor insurers will face a tough and discouraging year due to falling prices and the rising cost of claims. The combined ratio (that is, the ratio of premiums paid to claims costs) was 95% in 2018 and 97% in 2017 which are both regarded as profitable. However, it is predicted to fall to a loss-making 104% by this year.
The primary reason behind this fall is the cost inflation for the undertaken repair work which has led to higher claims costs for the insurance company. These have risen by about 6% per year owing to the specialized technology required (in areas like bumpers and wing mirrors).
Now, any losses made by insurers at the underwriting level are normally compensated for through profits elsewhere. This year, though, that horizon is also not very promising with low-interest rates.
Investment portfolio, charges to customers for supplementary services, and referral fees paid by lawyers are some of the income avenues. At the moment, the insurance environment is extremely volatile and fraught with uncertainty. Operating profitably right now is not the easiest task.
Seeing the bleak cloud that surrounds the motor industry, there is little hope that circumstances would see a shift soon. Short-term positive trends are close to impossible and any positivity would be reflected in sales stabilising instead of worsening.
Spixii solutions can help in these uncertain times. The need of the hour is to apply smart, strategic solutions that reduce operational costs. In the next week’s blog, we’ll cover this point in-depth. In the meantime, you can find out more about the Spixii solutions here and interact with the infobot here.
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