Historic data for pricing is ’no longer applicable’, says Allianz head of motor

One of the UK’s leading commercial motor underwriters says the sector is still trying to come to terms with a cocktail of challenges that have been caused by a series of systemic events over the previous five years.

Gerry Ross, head of commercial motor at Allianz, says the industry has been faced with the need to effectively end the traditional approach to the underwriting of commercial vehicles – with the practice of using historic data for pricing no longer applicable.

“The way things have fallen has made it very challenging,” he explains. “In commercial motor we have in effect undergone a traditional underwriting cycle in a very concertinaed timeframe.

“Brexit created a labour crisis for many businesses, then the Covid pandemic saw a significant drop in claims which drove dramatically improved performance and only added to the softening market conditions.

“I think we all agreed that one of the worst case scenarios for a market which is seeing a softening of rates is a move to a high inflation environment.”

Ross adds the speed and scale of the rise in inflection caught everyone out, including the Bank of England and, in turn, businesses.

Prediction models

Ross continues that consultants – such as EY – had predicted commercial motor insurers would achieve an average combined ratio of 110% for the next two years.

“They are predicting those type of returns for the retail motor market,” Ross explains. “However, the commercial market has seen a huge growth demand in recent years as more vans are on the road given the rise in online sales and the requirements for deliveries.

“That demand for commercial vehicles, particularly small vans for deliveries, has also created a market where used vehicles are holding their values.

“Those values are being retained despite the fact the vehicles are getting older and more mileage is being put on the vehicles because they are being worked so hard.”

Ross says the ability for vans to retain their value had seen the market no longer able to rely on past risk costs and calculations – and the market faces further disruption.

Ukraine disruption

“There is a greater risk to the industry’s use of established claims calculations because of the disruption we have seen in recent years,” Ross adds. “The costs of parts have been rising as shortages were created by the war in Ukraine, but these have not been priced in.”

“We are seeing claims inflation, particularly around total loss events due to the current end to the devaluation of vehicles. We need to understand market values and how they are changing.”

The war in Ukraine put pressure on the supply of parts and Ross says motor manufacturers were faced with a shortage of cable harnesses, many of which were manufactured in Ukraine.

“Manufactures have worked hard to find alternatives and on the whole the shortages we saw at the start of the war have been eased, although there are still specific pockets where supplies are still very challenging.”

Labour shortage

Disruption in the supply of specific vehicle parts comes alongside ongoing issues that have been caused by the labour shortage.

Gerry Ross (1)

Gerry Ross

Ross points to the recent announcement from vehicle repairer Halfords that it is currently seeking to recruit 2,000 motor engineers with the understanding that it might need to attract those who have already retired, such is the shortage of labour.

This has had the effect of driving up wage costs against a backdrop of the cost of living crisis and this should be factored into claims costs.

“It is causing difficulties for motorists when it comes to getting their vehicle’s MoT renewed, serviced, or repaired by their insurers.

“Repairs are also very energy intensive and while the government is still offering subsidies on energy costs at present there is a question over what will happen once those subsidies come to an end.”

Ross says the issue for insurers remains that there are so many unknowns around the direction of the economy, the ability to tackle inflation and the changing claims environment.

“We have had Brexit, the pandemic, inflation and the war in Ukraine and it has impacted the supply and demand across the commercial motor sector,” he adds. “As we emerged out of Covid there has been a huge demand for commercial vehicles as the way retailers operate has changed.

“The ONS (Office for National Statistics) has said that car mileage has not returned to pre-Covid levels. However, van mileage is already above the levels seen before the pandemic.

“If you have a van you use it. While [many] workers have been able to move to a hybrid system where they can spend periods of the week working from home, if you are plumber you need to go where the leak is.

“During the pandemic we did see a fall in claims because, while van drivers and other tradesmen were still required to use their vehicles, they did so on roads which were significantly less congested.

“It is an untidy cocktail for insurers and use of prior data is challenging.

The industry is also looking to move the claims market towards a greater degree of sustainability, but that move is proving to be tough given the perceptions of some clients.

“We are keen supporters of a move towards the use of more green parts but I think there are a few myths that need to be challenged,” Ross adds.

“When we talk about green parts, we are not saying we will put a green coloured door on a black car. We have a duty to restore the vehicle to its pre-accident condition and the use of reconditioned parts has a large number of benefits for the insurers, our ESG efforts and the customer.

“The more we can use green parts in repairs the better for all, as they are cheaper and those savings can be passed on to the customer via their premiums. It is something we want to see more of in the commercial vehicle market.”