Short-term pain for the insurer could end up in long-term gain if its strategies pay off

Hastings’ battle against rampant claims inflation has been well-documented, but 2020 could see better times ahead for the insurer.

Once a star performer and beloved by investors, the insurer posted a whopping 40% profit drop and a significant worsening of its combined ratio in its latest annual results, posted yesterday.

Investor reaction was less muted than it might have been, possibly due to the trading update it released last month to take the sting out of the tail.

There were a few silver linings, such as a 5% growth in policy count and flat premiums, but the immediate picture is still pretty grim.

Paul De’Ath, head of market intelligence at Oxbow Partners acknowledged it had been a difficult year for Hastings, with the insurer being the hardest hit among its peers.

Combination of factors

It has suffered from above-normal claims inflation in 2019 (7-8%), as well as affects of the lower than expected Ogden discount rate change. Throw rising credit hire costs and increasing levels of fraud into the mix, and Hastings’ results were hardly surprising.

But De’Ath sees positive signs for 2020. Hastings has set a loss ratio target of 75-79%, and if this can be achieved then profit should return, he said.

He cited the growing number of customer numbers in the second half of the year as being driven by better retention. This, in turn, should cut customer acquisition costs.

A huge rise in fraud detection (96% up year-on-year) should also help to lower costs, De’Ath said. 

Hastings’ change of focus to profit rather than growth is a sensible approach, De’Ath added, although this has been more challenging for the insurer than its peers.

”The business has been doing the right thing in focusing on profit over growth in the less favourable market conditions seen during the year. The improvement in retention is impressive and the group’s anti-fraud credentials remain excellent,” De’Ath added.

Motor influences

Manan Sagar, chief technology officer for insurance, Fujitsu UK, said that Hastings’ fall in profits aligns with the trend he is seeing in the car insurance sector.

”Competition has made it increasingly difficult for insurers to make headway in a crowded market.

”The comparison websites, while helping customers switch, are creating an annual cliff-edge for insurance companies. The focus on price is only going to result in a race to the bottom.”

He added that to survive in the changing marketplace, insurers need to change the way they operate - this includes moving from a “repair and replace” model to instead adopt a “predict and prevent” approach.

“Insurers can use the new technologies available and combine them with the vast amount of data they own to create valuable insights and help prevent accidents from happening in the first place,” he said. 

”This will require car insurers to adopt dynamic risk-based pricing. In other words, a ’smart insurance policy’ that shifts in price based on driver data feed; data that provides insights about not just the distance, when and where a driver drives but also how they drive.”

Insights such as these can then be used to improve driving habits and promote road safety, Sagar continued. For example, by increasing rates if drivers exceed the speed limit.

“Consumers switch insurers in year two because they are being expected to pay more as their first year discounts are no longer applied. However, very few would challenge an increase in premiums for a journey where speed limits are consciously being broken. A real understanding of cause-and-effect would also build trust with customers, who will be less incentivised to switch providers,” he added.

“When accidents do happen with smart policies, associated data feeds will not just automate claim adjudication and payments but also prevent fraud, saving the insurance industry millions and improving profitability.”