Aviva, Direct Line Face IT Threat To U.K. Motor Insurance Dominance

Two of the U.K.'s top three motor insurers face a growing threat to their dominance as their rivals increase the use of technology in attracting new customers and keeping the ones they have, experts say.

Aviva Plc and Direct Line Insurance Group Plc, which are first and third among U.K. motor insurers by market share, according to S&P Global Market Intelligence data, are likely to be increasingly challenged by a shift away from their model of selling directly to customers and toward sales through price comparison websites, as well as by advantages available to insurers better able to harness technological potential, according to Iain Pearce, an analyst with Berenberg. That could boost second-place Admiral Group Plc and smaller rival Hastings Group Holdings Plc in particular, he said in an interview.

UK Motor insurance market share

Data points such as a driver's age, accident history, occupation, and residence are key factors when insurers price quotes, with younger motorists customarily charged more than their elders, for example. But both Hastings and Admiral have sought to go much further, in the latter's case through a venture that would have seen customers agree to let it mine their Facebook data for behavioral cues in exchange for a discount.

The social media giant eventually quashed the idea just hours before its launch, saying it does not allow the data it holds about members to be used for such purposes.

At Hastings, meanwhile, data crunching goes beyond the sales process, extending to attempts to predict whether customers are likely to switch insurers for a better deal, or whether they might be likely to use other, higher-margin services the company offers.

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For example, some classes of drivers, particularly younger ones, may be less able to pay a full year's premium up front and be more likely to pay by the month, which carries an additional financing charge. That means Hastings' brokerage arm can quote a lower full-year price in the knowledge that the total return will still exceed what it would otherwise have shown, Pearce explained.

And critically, he said, Hastings allows its brokerage arm to use the data available to set prices without having to check back with the company's underwriters.

"Their brokerage is basically able to adjust pricing based on what it's seeing in the market on a real-time basis [to take advantage of] ancillary opportunities that companies make a lot of money from, but that all sit in the brokerage line," he said.

The flexibility given to the brokerage arm and the use of unusual data points, such as credit scores, are key advantages for the company, Moody's wrote in a late 2015 report.

"Technology has given Hastings a competitive edge, enabling it to effectively compete on price and rapidly grow its market share," Moody's analyst Helena Pavicic wrote. The company reported a market share in private car insurance of 6.4% as of September 30, up from 5.6% a year earlier.

Founded in 1997, Hastings has a wealth of data to call upon, despite its relative lack of scale, said John Leech, head of automotive at KPMG UK. That allows the company to draw statistically significant correlations between driver characteristics and accident risk.

"The volume of data is really the key to getting the right pricing, because only with high volumes of data can you make those better predictions," Leech said in an interview.

Motor (commercial & personal) nonlife technical ratios

That comes as yields on sovereign bonds and other low- to no-risk assets in which insurers invest premium income plumb new depths on the back of loose global monetary policy. And the sounder the underwriting logic, the more profitable a given policy is likely to be, a crucial factor for a U.K. motor insurance industry that risks losing the ability to offset a long track record of unprofitable underwriting through now-dwindling investment gains.

The aggregate combined ratio for the sector, expressing claims as a percentage of premiums, has been above the 100% level that implies break-even underwriting performance since at least 2005, data shows.

The growing popularity of price-comparison sites has also concentrated insurance customers' minds on achieving the best possible price, with less regard than might previously have been the case for factors such as customer service or carrying on a multiyear relationship with the same insurer. That increases the importance of cost control, where IT savvy can also pay off.

Insurers that do not sell through price-comparison sites, such as Aviva and Direct Line, face higher marketing bills and also tend to have a client base less willing to manage their policies through online portals that are cheaper to provide.

Expenses accounted for 15.2% of premiums at Hastings in the first half and 17% at Admiral, while Direct Line's expense ratio was 25.7% and Aviva's was 30.1%.