The automotive industry is in the early stages of fundamentaltransformations that are beginning to radically change bothfrequency and severity of auto claims. Rapid adoption of newtechnologies, materials and more powerful engines are driving thesechanges. Hybrid cars are beginning to reach critical mass. Electricpowered vehicles like the Nissan Leaf, Chevy Volt, and TeslaElectric Vehicles are about to hit showrooms around the country.

Collision avoidance systems using radar and sensors are alreadyin some high-end luxury cars and will inevitably move into themainstream market. Event Data Recorders (EDRs), reporting ondriving habits and usage along with accurate GPS-based locationtagging, are becoming mainstream. New materials, components andcrumple zones have altered injury and severity profiles.

Examples of impacts:

• Recent claims data on hybrid cars already reveals trends thatare not always intuitive or expected. IndustryTrends reports that hybrid car claim severity is 6.5 percenthigher than the average gas-powered vehicle claim. A majorcontributor to these higher claim costs is the availability oforiginal manufacturers’ parts versus aftermarket repair parts.
• The Highway Data Loss Institute notes surprisingly that hybridelectric vehicles (HEV) typically have higher collision claimsfrequencies than their internal combustion engine (ICE)counterparts. HEVs are more likely to hit pedestrians and cyclistsdue to their almost-silent operation when running only on batterypower. Best Review reports that Toyota Prius owners receive 65percent more traffic tickets than ICE vehicles.
• HEVs and EVs also introduce new hazards in accidents in termsof high voltage components and compromised battery packs. Batterypack location is also a significant variable. When a battery packis damaged, unlike your current car battery, it is not repairable.It has to be totally replaced and almost inevitably requires dealernetwork support.

• New components such as LED lights add considerably to the costof repairs. A headlamp employing LED technology can run over $1000to replace on even entry-level luxury vehicles.

Sales Trends

Current sales of new technology hybrid electric and electricvehicles are modest, but projected to rapidly increase. There isstill a significant price differential for HEV and EV vehiclescompared to conventional. This differential is partially offset bystate/federal tax incentives. These incentives are time-boxed andsometime capped. The differential will inevitably close as volumesand competition increases.

As gas prices increase, these new technologies become moreattractive. Availability of infrastructure support such as chargingstations is also critical along with average commute mileages. Somesuggest the $5 per US gallon threshold will be broken in 2012,spurred on by growing Asian demand. All these variables need to bemonitored and assessed as lead indicators of future sales of HEVand EV vehicles.

Fuel Mileage Standards

Fuel mileage standards will also change the mix of new vehiclesbeing sold as manufacturers work hard to meet the thresholdsrequired. The National Highway Traffic Safety Administration(NHTSA) and the Environmental Protection Agency have jointlyreleased new Federal CAFE fuel mileage and greenhouse gas emissionsrequirements that will cover the 2012 through 2016 model years. Theestimated fleet-wide fuel economy standard has been set at 34.1miles per gallon by 2016, though improvements in air conditioningsystems will bring that number up to around 35 mpg. That equals astandard of roughly 250 grams of carbon dioxide per mile. Theoverall fleet fuel mileage requirement will be an average betweenboth passenger cars and light trucks, and NHTSA is predicting thatthe 2012 numbers will be 33.3 mpg for cars and 25.4 for trucks in2012, rising to 37.8 for cars and 28.8 for trucks by 2016.

Fast-Moving Changes

Rating agencies currently use auto symbols to differentiatebetween different vehicles, but are generally over-weighted byhistoric trend data and less by future emerging trends. Whilegeneral trends and rating agency data services are foundational formost carriers, the specific demographics of each book can differenormously with unique characteristics especially for carrierstargeting specific affinity markets and geographies. Unless acarrier is monitoring and managing trends—especially leadingindicators—on a frequent basis, it will find its practices andrates to be less than optimal.

To stay profitable yet competitive, auto insurance companieshave to become far more agile and responsive as new data and trendsemerge. Companies will need capabilities to identify, capture andanalyze new kinds of information, some of which does not existtoday. Responses will require changes in both rates andclassifications as well as claims adjustment practices.

Business Intelligence isKey

Business intelligence systems providing key performanceindicators (KPI’s) are vital to identify and monitor indicators totrack trends that are diverting from the norm. This requires asystemic approach that combines claims, policy, reinsurance anddistribution dimensions of data along with external source dataenrichment. Only after this data is combined and mined, willcompanies have a comprehensive view of what is actually goingon.

Underwriters and rating actuaries in particular need to have afast feedback loop. Only through this streamlined feedback approachcan they be more proactive in updating practices, rules and ratesas trends emerge.

It’s for this reason that insurers need an enterprise-wide viewof data and processes and develop a business intelligenceframework. This holistic approach transcends traditional silos toprovide the richness of cross-domain analytical data needed. It isonly by looking at all data simultaneously that policy, rating,underwriting, claims, and reinsurance business decisions can bemade that will bring the greatest reward back to the company.

In addition, business rules need to be externalized from theprogramming code in a business friendly repository. The repositoryneeds to be easily maintained for the needed responsiveness tochanges. Where process flows have to be overhauled, having abusiness process management capability is critical to make fastadjustments.

Those companies that can identify and quantify those trendsearlier and can respond quickly will have a distinct advantage overtheir competitors. There is no doubt that increased volatility inclaims experience will drive many IT initiatives to improvecapabilities in these key areas.