The impact of the coronavirus pandemic has been felt in every sector and the motor industry is no exception. Uncertainty, restrictions and social distancing measures have affected car dealers and production plants with delayed production and a fall in new car registrations. But it’s not just these areas that have felt the pandemic’s influence. Coronavirus has changed the way we used cars and it’s subsequently shaping the motor claims ecosystem.
The pandemic has altered our everyday behaviour and that includes our driving. Lockdown restrictions and government guidance to stay local have discouraged people from driving and resulted in fewer cars on the road. In March 2020, during the first lockdown, road travel dropped by 73% compared to pre-outbreak levels, according to Cabinet Office data – although levels will have increased over the course of the pandemic and as restrictions relaxed. This drop in road traffic is corroborated by Cazana’s analysis of MOT data (see chart below) which found that, on average, cars were logging 500 to 1,000 fewer miles per year in 2020, than they were in 2019. It’s a gap we should expect to grow even wider when MOT test numbers return to normal, following the six-month test freeze, and a full set of data can be obtained.
Fewer cars on the road have a number of knock-on effects but for insurance companies they mean fewer claims. Some car insurance firms registered a 50% drop in claims when the first lockdown was announced and similarly low levels at the start of 2021. Figures somewhat recovered towards the end of last year – the travel around Christmas presumably acting as a factor – but the pandemic continues to reduce claims numbers when lockdowns are imposed. As long as we’re in lockdown, we should expect motor claims to stay low.
On face value a reduction in claims would appear to be nothing but good news for the insurance industry as insurers see significant improvements in the COR (combined operating ratio) due to this temporary reduction in outgoings. The issue is that there is a wider eco system of claims services that rely on claims, and claims management, for their business to prosper. Companies that provide credit hire, 3rd party claims assessment and other ancillary services relating to claims management have seen a large portion of income come to an abrupt halt.
This claims drought dries up income streams for these types of businesses and places them under financial pressure. As long as claims stay low, this pressure will continue to be felt. This will eventually start to have a negative impact up stream to the insurers themselves as if these businesses are unable to survive then a large portion of insurers service proposition will be shut down. For example, if there are fewer businesses able to provide simple services such as replacement vehicles then that will not only impact customer satisfaction but also the additional revenue generated by the premiums from these additional services.
In addition to those businesses that are directly involved, in claims management and claims fulfilment, most insurers have a network of preferred suppliers/repairers that again rely on claims for large portions of their income. In exchange the insurers get preferential rates and agreed service levels. If these businesses are unable to survive or have had to significantly reduce workforce numbers this will increase turnaround times on repairs, again affecting customer satisfaction and potentially creating additional costs of claims paid.
However, this drop in traffic and claims doesn’t mean the future is all bad for such companies. Once lockdown lifts, we should expect a spike in claims as traffic rushes back to the roads. Coronavirus has also increased the value of car ownership as safety concerns pull people away from public transport use and towards private travel: according to the RAC, more than half (57%) of drivers say having access to a car is more important that it was before the pandemic. And though the move to working from home may reduce business travel, it’s unlikely to wipe it out. At the end of last year, 64% of motorists still expected to drive to their workplace in the future; a drop of only 3% from surveys conducted before the pandemic.
A higher number of claims isn’t the only change we should expect once lockdown ends. It’s likely the motor claims services will experience an overcompensating increase in claims risk from new drivers (stalled over lockdown by the suspension of tests and lessons), out of practice drivers and vehicles that were poorly maintained during the pandemic.
The motor claims sector has not been immune to the pandemic and has felt its effects from the beginning of the first lockdown. Yet whilst a dip in traffic levels and claims is concerning for some parts of the sector, this fall should only be temporary. The end of lockdown will likely be a busy time for claims departments as cars return to the roads and the public look to make the most of new freedoms and opportunities.