The EU Gender directive comes into force today, but how will insurers and drivers cope with the changes? Jon Byford explains.
The EU Gender Directive has become a reality and debate about what this will mean for the market is still as fierce as ever.
The only thing that we can be certain of is the uncertainty as rates are introduced and insurers jostle for position, keeping a watching brief on competitors.
Besides, in the first few months of 2013, there is a bigger question about the longer term effects on the market.
As insurers will no longer be able to set rates based on gender, the biggest impact will be felt by young female drivers - statistically safer than young men - who could be driven off the road.
Indeed, a recent Uswitch survey suggested that up to a quarter of female drivers could be forced to stop driving owing higher premiums.
Insurers with a focus on younger drivers will have to reassess their appetite to continue writing in this segment of the market.
Unless motor insurers are able to identify alternative risk differentiators, they can expect deteriorating sales.
This will be more pronounced if, as expected, the best young drivers are attracted to telematics-based solutions.
Telematics products are, to a degree, self-selecting and any poor drivers will be identified quickly through their data. Their cover could be removed, or become prohibitively expensive, driving these policyholders back into the traditional insurance market.
Faced with falling sales and the loss of better drivers, non-telematics insurers in the young driver market will need to increase rates, reduce their exposure to this market segment or withdraw completely.
Coupled with steadily increasing non-insurance motoring costs, this could result in young drivers, in particular females, choosing not to get behind the wheel.
Statistically young drivers are among the most likely to have small and catastrophic accidents so, on the face of it, reducing the number on the road could be a benefit to the industry and society as a whole.
However, simply making the cost of cover prohibitive is likely to encourage uninsured driving, or misrepresentation of risk details, especially age, to fraudulently obtain affordable insurance cover.
The introduction of the directive may create a situation where drivers are passing their test at 17 or 18 but find the cost of driving too prohibitive.
This could lead to more ‘fronting', where parents take out insurance and add their children as named drivers to obtain affordable cover. This not only means misrepresenting the risk to insurers, but young drivers will be prevented from building up a no-claims discount.
Young drivers may decide that owning and insuring their own car is too expensive and, looking five years down the line, there may well be a plethora of drivers in their mid-20s who return to the road, thinking that the premiums will be cheaper.
For some, this may be their first time in a car since passing their test, with little driving experience and a lack of no claims discount, and insurers will conversely have to price this as an increased risk.
Currently, telematics solutions are not cost effective once premiums drop below a certain point - hence their targeting toward higher risk market segments.
There is a strong correlation between age and catastrophic claims, but we could face a situation where an entire generation of drivers is priced out of the traditional market.
The only way for young drivers to pay an appropriate premium for the true risk they represent will be to go down the telematics route.
But rather than reducing the availability of cover for younger drivers, we should be working to improve the standards of new drivers.
The Association of British Insurers has proposed a number of measures designed to work toward this aim, and as an industry we should be focusing our efforts on supporting these proposals.
A number of suggestions have been identified which significantly reduce the chances of young drivers having a motoring accident.
These include extended training periods before the driving test can be taken, and restrictions on night-time driving and the number of young passengers that can be carried.
Adopting these measures will go a long way toward the industry being able to continue to offer competitive insurance to young drivers.
Jon Byford, head of personal lines intermediary motor, Axa Insurance
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