The unprecedented nature of this event creates a great deal of uncertainty, particularly for the insurance industry, which relies heavily on past experience to predict the future and for making key business decisions. Gaining insight from countries at the forefront of the pandemic is therefore a valuable source to inform insurers on developments they might expect, whilst recognising each country is likely to experience its own variations.
China’s experience
China are five to six weeks ahead of European countries, with the first death recorded on 11 January 2020. Restrictions began on 16 January and ultimately led to what the Wall Street Journal described as the largest quarantine in human history.
From a motor claims perspective, China’s new claims volume dropped by 40% over the initial three working days (16- 20 January) and then, just two days later, the volume tumbled to zero and stayed there for three weeks through to 10 February. Throughout the remainder of February, volumes gradually increased by 20 percentage points every five working days, so that by 25 February volumes were just 20% below the forecasted level for the period.
By 24 March, China announced that restrictions had been lifted and that three-quarters of the workforce had returned, resulting in several working days at the end of the March where reported new claims volumes were up to 60% above the forecasted volumes.
US and European countries
As the first European country to enter lock-down, Italy saw its new claims volumes start to drop from the 10 March, with volumes down two days later by 40% compared to 2019. Spain, France and Belgium all experienced a steep fall in volume commencing on 16 March, with both Spain and France reducing to 80% below the prior year level by the end of the month.
The US, UK and Germany’s volume reduction during March was more gradual by comparison, but still resulted in a substantial 60% – 70% reduction in volume by the end of the month.
However, none of these countries have [yet] hit the zero level that China experienced. In the last few days of March the drop off level ranged from Spain at 80% below prior year volume, to the UK at 60% down.
Netherlands has been an outlier with new claim volumes only reducing by 20% in March compared to 2019, in line with their “intelligent lockdown” policy.
Automotive industry
For an industry which is truly global, both for vehicle manufacturing and their supply chain, the crisis has closed virtually the entire automotive value chain. Whilst some suppliers have a regional focus, even those operating ‘just-in-time’ supply via on-site supplier parks or sub-assembly facilities are dependent on supplies from across the globe. Low-cost and commodity vehicle parts are often manufactured in lower-cost economies, leading to an extended supply chain.
Both OEM’s and suppliers have suspended production and dealerships have closed. For example, the top-10 of the AM100 UK dealer groups (representing 50% of the £70bn dealer turnover in the UK) have closed their retail and a substantial part of their servicing operations.These factors have the potential to create several challenges in the weeks ahead, including:
On a wider economic level there will be hope for a quick recovery, but the risk of a global recession coupled with high unemployment is real, with serious consequences for all industries.
UK vehicle factors
The UK government has taken necessary action to support the lockdown, including a six-month extension for all MOT certificates due from 30th March and halting all driving tests for three months, which will slow sixty thousand new drivers per month from coming onto the road.
Many in the UK may be anticipating an extension to the initial three-week lockdown, with the vulnerable already having been asked to stay at home for 12 weeks. This would keep a high proportion of vehicles off the road for longer and claim volumes down.
However, depending on the timing and phasing of the lifting of restrictions, it is reasonable to anticipate a surge in UK driving as people return to non-essential travel, including leisure activities and a significant rise in staycations. Consequently, an increase in new claim frequency, as seen in China, seems likely.
The response
For UK motor insurers, repairers and service providers, the initial priority has been to maintain a limited frontline operation so they can keep key workers mobile, providing essential repairs or replacement vehicles where required, whilst also keeping their staff safe.
The subsequent focus will be on scenario planning, to prepare for post lockdown. As outlined above, there is potential for a high demand and a shortage in supply, which may be seen in pockets or it could be universal. If this occurs, it could lead to an increase in temporary repairs (to keep vehicles driveable) as well as increases in cash-in-lieu of repair, in the proportion of vehicles declared a total loss (to get customers back on the road), more inconvenience payments and additional replacement vehicle provision.
Preparing well for these scenarios calls for close collaboration between insurers and service providers to develop rigorous plans and to support each other throughout. It will also require leadership, creativity, agility, excellent communication and resilience to successfully manage through these unique circumstances and uncertain times.
Tom Helm, head of claims consulting at Willis Towers Watson
David Shepherd, regional managing director at Solera
*Data used in this article has been sourced from Solera Audatex and cap hpi
