Auto Insurance in 2023 - How Digitization will Influence the Risk Scoring Model

by Albert Wienen

The digital world is changing at a rapid pace. Through innovations and new technologies we are on the eve of a largely self-driving and self-thinking car.

Despite the positive steps taken by the Europe Union, Google and car manufacturers such as Tesla, Mercedes Benz and General Motors, I expect it to take at least another five years before the self-driving car becomes accessible and affordable for the masses. In the short or long term there will be many consequences for everyone who drives or otherwise participates in traffic.

The Impact of new Technologies on Claims Costs
These new developments will also impact car insurers, and especially in the way in which the premium of motor insurance will be realized. Widely used car safety features, such as parking sensors, adaptive cruise control and parking assistance have already showed a positive trend of fewer damages being claimed from insurers. On the downside, the average amount of damage is expected to rise as in the event of an accident these new advanced components are more expensive to be repaired.
Nevertheless, we expect that the advantages of new technology will prevent car accidents and increase further in the future so that the total cost of claims is expected to decrease overall.

Risk Based Premiums
The main question is how insurers will calculate the risk premiums for insurance policies in the future. Persons investing in a car equipped with new techniques expect a reflection in a discounted premium. The current premium models of insurers cannot sufficiently make this distinction based on statistics from the past. This requires the introduction of new risk indicators.

Part of the solution is the introduction of a personal risk score consisting of three components:

  1. The first one is the moral component: It concerns matters such as previous claims, payment history, criminal records, insurance mobility (how easily someone transfers to another insurer) and periods of uninsured driving.
  2. The second component is technical risk: It covers dimensions like age, years of driving experience, number of demonstrable damage-free years, family composition, current financial situation, annual mileage, the region where the insured lives and the region of car usage.
  3. The third component is big data: An intensive collaboration between car manufacturers and insurers is to be expected. Car manufacturers have been collecting big data from cars in recent decades that can be utilized by insurers. This will make it possible to differentiate the risk premium based on brand, type, engine capacity, design, safety provisions and even color.

Open Market for Personalized Contracts
With the introduction of the personal risk score, there will also be room for new digital platforms on which insured parties and insurers can find each other. On those platforms private persons looking for new insurance policies make their personal risk score and details of required policy cover available. Based on this information affiliated insurance companies can digitally offer a contract with an individually calculated premium. This new distribution method of supply and demand forces insurers to offer individuals with a good risk profile a low risk premium. On the other hand, consumers with a poor risk score will start paying a higher premium. From the thought 'the polluter pays' this is a principle to be defended.

In five years we will know what the future actually looks like in 2023. It is clear, however, that much will change for insurers and their insured parties in the coming years under the influence of technological innovations and the availability of big data.

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About the author

  • Albert Wienen

    Albert Wienen is Business Consultant specialized in fraud detection and claims process optimization for the insurance and heathcare industry

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