The traditional notion of car ownership is under threat. Tech innovation, the sharing economy, and the soaring cost of running a vehicle are giving rise to a new age of driving. Increasingly, drivers are choosing to carpool, share vehicles or borrow from others when they need them. Attitudes are changing from absolute car ownership to a more flexible, fluid approach to driving. The car insurance industry needs to respond to this by becoming more flexible and cost-effective for drivers.
There is little doubt that the car industry is in flux. New car sales have fallen for eight consecutive months. We’ve also seen a record decline in teenagers learning how to drive. In the last ten years, the number of 17-year-olds taking lessons has fallen by 28 per cent, while there’s also been a 20 per cent drop in under-25s learning how to drive. It is thought the rising cost of running a car is likely to be playing a part in these trends.
Indeed, car insurance costs have risen three times faster than wages since the turn of the century, and the average annual premium is up by more than 14% in the last year, according to industry data. Costs have risen particularly steeply recently for two reasons. Firstly, there has been a series of increases to Insurance Premium Tax. This tax is usually included within the price of a policy, and the rate has gone from 6% in 2015 to 12% in June this year. Secondly, earlier this year the government cut the Ogden rate from 2.5% to minus 0.75%. The Ogden Rate is used to calculate personal injury claims from motoring accidents, and the change effectively doubled the cost of pay-outs; which in turn is pushing up insurance premiums. Young drivers in particular have borne the brunt of rising costs, with the average premium for 17-24 year olds increasing by just under 8% in 2017.
It’s not only insurance costs hitting people’s wallets. Car prices rose significantly earlier this year as a result of currency devaluation associated with Brexit, and petrol prices reached a four-month high in September. The average annual cost of using your own car is now thought to be around £2,400 once insurance, fuel, taxes and other charges are accounted for. This is a huge amount of money and for many people, especially young drivers, owning a car has become unaffordable. In research we carried out earlier this year, we found that the cost of running a car eats up a fifth of the annual take-home pay for someone aged 17-22.
Unsurprisingly, given these costs, we are now seeing people adopt a more flexible approach to car ownership. Car-pooling sites are popping up all over the UK and peer-to-peer car lending is on the rise. However, for those taking a flexible approach to driving, insurance is still a significant cost and a complicated process. The insurance industry still largely adopts a ‘one size fits all’ approach to the products offered and continues to price its customers using generic factors such as age and location. This generally isn’t suitable for infrequent drivers, who end up subsidising high mileage motorists. Recent research found that almost one million drivers in the UK are only behind the wheel for one hour a week, and many will be wasting hundreds of pounds a year on annual cover.
To meet the needs of today’s drivers, insurance firms must offer products which are tailored to customers. Insurers also need to offer a level of flexibility which accurately reflects current and future driving behaviour. The companies which adopt this approach now will be in a far better position when the inevitable advance of driverless cars heralds a major shake-up of the insurance sector.
Other industries including travel and accommodation have seen significant disruption from the rise of the sharing economy, and no industry should see itself as immune from this. In the future, it is possible that we could see the emergence of a comprehensive car sharing system not dissimilar to the ‘Boris Bike’ model. The insurers which get ahead of the game now and adapt by offering more flexible, bespoke products for their customers, are far less likely to be left behind in the future.
Freddy Macnamara is CEO and founder of pay-as-you-go insurer Cuvva.