Auto insurance market in trouble?

Looking around, we have the credit crunch and rising commodity prices coming together and undermining consumer confidence. This is particularly affecting the health of the auto insurance market which depends on a number of factors, i.e. the number and type of vehicles on the road and the extent of the cover sold. The shuttering of U.S. car plants is an indication that the market for larger vehicles is ending. Add in the cost of gas which now seems likely to stay above $4 per gallon for the foreseeable future and the insurance business looks poor.

Why is this the case? If vehicle sales stay flat or decline that means the average age of the vehicles on the road is going to rise. As these vehicles depreciate, policy holders will cut back on the cover they buy since they will have less capital worth at risk. There is less need to carry comprehensive or non-mandatory collision cover if the vehicle itself is of low value and the second-hand market will provide a cheap replacement. This will affect all vehicle segments both commercial and passenger and will seriously limit market growth. To compensate, the insurance industry is trying to refocus its marketing on motorcycles, electric and hybrid vehicles, and other non-traditional speciality vehicles. These are smaller business opportunities but show signs of growth.

Generally, the battle for market share is growing more intense as the leading brands try to hold on to their customer base. As it stands, about 80% of business is held by the top 25 insurance underwriters. Within this 80% there is a hard core of profitable, preferred-risk drivers. Young, inexperienced and more reckless drivers are merely tolerated to maintain brand awareness in word-of-mouth. There is significant policy churn with all drivers buying policies on a six to twelve month cycle. Because of this short-termism, policy holders review their policies on a regular basis making it more difficult to retain customers. It is estimated that about 10% of all policy holders change their insurers at renewal. If these holders have bundled say auto with homeowners, the value of the churn increases significantly, leaving the industry with the need both to improve retention and increase new business attraction to maintain stable policy income. As household budgets are squeezed, the tendency to transfer policies to lower-cost, more service-oriented providers will increase. The insurance industry is in for a hard time.