The Role of Insurance in Tackling Rising Inflation

By Samuel Knott
Samuel Knott, Head of Distribution, By Bits, discusses the prices rises and pitfalls besetting the UK auto insurance industry

We’ve just experienced what was widely referred to as 'April Cruel Day'. The day on which many prices - from broadband to council tax went up simultaneously. We’re also in the midst of the greatest cost of living squeeze for generations with both fuel and energy bills at an all-time high. It’s hitting people in the pocket with consumers desperately seeking solace in any sector able to buck the trend.

Unfortunately, the situation is going to get worse before it gets better. So the question is, what is the role insurance can play when it comes to tackling inflation?

A perfect storm of industry pressures

For a start, the insurance industry is not immune from inflation. Despite the growing popularity of electric vehicles (EVs), fossil fuel remains the dominant power of choice for the majority meaning it’s an industry that is totally exposed to the energy crisis. We’re also seeing people return to travel. The halcyon days of traffic-free, noise-free, and pollution-free roads of the pandemic are long gone. More traffic means more risk and according to industry and media reports, insurers may hike premiums this year in response to market volatility.

Sadly there are other factors at play too. A perfect storm of industry pressures and COVID-19 disruptions have caused a global shortage of the semiconductor chips needed for new vehicles. The European Commission (EC) recently announced a Chips Act that will see it plough 43bn euros (£36bn) of public and private investment into Europe's semiconductor industry to mitigate this from happening again in the future but, for now, at least, it’s driving up the cost of vehicle ownership. Elsewhere, replacement and repair costs are up and the availability of skilled staff and vehicles are down.

In short, this is an economic case study on rising costs that, in the end, tend to be burdened by one group - the consumer.

A fair option in an unfair world

Price has always been a defining factor in how people buy insurance but what we are seeing now has upped the ante considerably. On the one hand, there is no silver bullet solution to much of this - insurers are highly capable people but they can’t cut your fuel bills. But on the other, it has created a burning platform for change within the vehicle insurance sector where fairness, transparency, and personalised pricing can make the world of difference.

The narrative of the moment is ‘prices are going up’ but motor insurance is in an enviable position where it has the potential to price premiums based on individual usage so people pay as they drive. In an unfair world, that sounds like a fair option. It’s why usage-based insurance (UBI) is a powerful weapon for both insurers and drivers in the war against inflation.

Opening drivers' eyes to the fairness of their policy

Aside from taking cars off the road, the pandemic opened drivers' eyes to the fairness of their policy. Many were, rightly, questioning why they were paying an annual premium when they were not using their vehicles. Some insurers offered rebates but they tended to be small, token gestures. And why should somebody driving 700 miles a year pay the same as somebody driving 7,000? But this is where the adoption of UBI policies can help reduce the cost for drivers while simultaneously showcasing that insurers care, listen and act on what consumers want - something that hasn’t always been the case.

Beyond the short-term impact on price, there are many other benefits too. It presents a genuine opportunity to bring technology and motoring together to encourage innovation and provide a better service to customers - all while changing driving habits that will have an impact on everything from air quality to premium prices. For insurers, it’s an offering they can make quickly and without having to overhaul legacy technology at all. In fact, UBI is a plug-in and play system and works by adding tools to an existing tech stack so it can be live in a matter of weeks.  Looking longer-term, it's only a matter of time before these types of usage-based products become an essential part of a modern insurers portfolio as access to driving data and behaviour becomes more nuanced and widespread to further tailor policy pricing and risk assessment.

A free shot at improving customer relations

When faced with rising prices no matter where they turn, what consumers are looking for - now more than ever - is fairness. Offering UBI does that and, for something that’s an inevitable industry development anyway, offering it to customers now is a free shot at improving customer relations and, in turn, potential policy renewal.


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