Reinsurance Tutorials #6 - Season 2
Today, we begin to address the Motor Insurance Line of Business devoted to the most popular object of the 20th Century, that is to say the goddess CAR, called Mercedes or sometimes less-romantic names that try to attract fans with comfort, design, room, safety, speed, technology….
My part is to describe the rise of this Starmania of empires and forecast its decline not only on our mindsets but also from a purely economic point of view...
To put it short, “The rise and fall of an empire”. Let’s find out together! ⏬
Flashback to the last century
The newly born motor vehicle has rapidly grown from a luxury product to a very popular one as the Germans say “Volkswagen” or “people’s car” a world-famous trade mark and mighty group despite recent difficulties owing to always more stringent environment protection rules.
The motor vehicle developed tremendously throughout the century. Every family in the developed countries had at least one car if not two or even more.
Its development spread further by the end of the century when highly populated countries like China and India improved their level of wealth and developed a considerable middle class.
The number of private vehicles expanded at high speed but also the number of other types of vehicles such as business cars, busses, light and heavy trucks, tractor trailers, heavy equipment vehicles for agriculture, construction and other purposes.
The Motor vehicle was:
- a tool to use to transport of people and goods,
- a sign of independence, pride, social wealth…
- a costly and dangerous
With the use of Motor vehicles came the danger of accidents that caused:
- Damage to property, the car itself suffered damage due to collision with a third party or the driver, but also due to hailstorm, flood, theft, etc.
- Damage to persons, people suffered bodily injury or death caused by third parties
The number of accidents increased faster than development of Motor vehicles primarily because:
- Vehicles could be driven at higher speeds,
- People were less aware of the effects of alcohol,
- The quality of roads could not cope with traffic density,
- People were simply not well-trained in the art of driving.
To deal with this increase in accidents:
- Motor Third Party Liability, MTPL, (or Bodily Injury depending on the legal system) insurance became mandatory in most countries,
- In addition to this compulsory insurance many motorists bought motor damage insurance to cover their “sacred” vehicles
As the number of cars and the number of accidents became very high, the price of insurance grew accordingly and with it, premium volume.
Motor Insurance became the main, sometimes dominant, Non-Life Insurance in many countries. Claims frequency started to decrease by the mid-seventies with speed limits, safety belts, better cars, road…so that:Gradually the price of insurance was reduced in real terms, even though the actual cost for an injured person increased (medical & hospitalization costs, social costs…). The relative weight of motor insurance premium volume as part of the total Non-Life volume began to stabilize in some countries.
However, as the number of vehicles on our polluted planet increases, global motor insurance premiums are still growing.
In 2020, the Motor Line of Business:
- Still represents 42% of worldwide Non-Life premiums,
- % greater for emerging markets (58%), less dominant in mature ones (38%),
(Source: a study from Swiss Re to whom we pay our respects)
By 2040, this percentage will decrease by 10 points to 32%.
What is going to happen ?
Yes, the number of cars and the global insurance premium will keep on increasing but not at the same pace and will in fact decrease in real terms per vehicle.
- Cars are not that popular anymore and becoming a tool not an icon.
- There is no more pride attached to a car, except for the happy few with luxury vehicles. Some people are now proud not to own a car. They look like the good citizens who don’t pollute and endanger the planet.
You know what? I do not have a car!
- There are more safety measures such as warning systems, speed limits, improved roads, better regular maintenance of vehicles,
- People drive better and there are incentives that lower insurance premiums,
- The increased use of car pools and co-sharing of cars will reduce the need for everyone to have their own vehicle,
- I am sure you have been waiting a while for this one; Yes, the “autonomous cars” will dramatically change car usage and claims frequency will have a dramatic downwards effect on the insurance premiums paid by insured,
- Not to forget the disruptive competition brought on by digital new-comers: innovative entrepreneurial companies financed by daring investors who expect high returns from these entrepreneurs,
- Car producers (Tesla…) are willing to broaden their activity using their initial product to develop and market others,
- Data owners (Google, Amazon…) are using and spreading their power,
- insurance groups are willing to keep up with the new distribution system despite the gradual increase in cost to their traditional network,
- Reinsurers are looking for new clients as mentioned in the first tutorial.
The combined effect of all these factors will further reduce both claims frequency and premium per vehicle.
Besides the decreasing role of Motor Insurance, some other Lines of Business will increase at high speed and take the lead in the coming years:
- Cyber Risks: a growing concern with ransomware, viruses, cybersecurity issues. The fast rise of attacks have increased awareness and willingness to buy a cover. Prices move up along with claims frequency and severity. The number of insureds is growing as well. It is becoming a major opportunity but also a challenge for the (re)insurance industry,
- Agricultural Risks: a major line in big countries as China and India. A difficult one, even more with climate change.
- Health Insurance: another LOB growing at high speed in many areas India, Middle East…
Our world is changing fast and Motor insurance is due to gradually lose its importance. Insurers have to prepare for this to ensure their own futures.
As we are advised when taking the tube in London, “Mind the step.” Or more simply, “Careful!”
This is the end of today’s story.
If you want to explore the next few chapters in this never-ending story, be our guest and continue watching with Sylvie, Laurent and Clémence !
They come next on stage !
Bye for now 👋
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