Cedric Stephens | Tech effect on auto premiums

ADVISORY COLUMN: INSURANCE HELPLINE

QUESTION: After many years, I am now back in the market for a new car. One of the things that I have noticed is the widespread use of technologies by motor manufacturers. They range from very complex pre-collision braking systems, frontal and side-impact airbags, maintenance reminders, audio and communication systems, reversing cameras with sensors and other devices. These state-of-the-art systems help motorists to drive more safely, reduce accidents and improve protection for passengers. Shouldn’t they also help to lower motor insurance premiums?

− TechEddie, Kingston 8

INSURANCE HELPLINE: Your query is way above my pay grade. I visited the websites of three leading motor insurers and their lobby group, the Insurance Association of Jamaica. Could they offer information to help me answer your question?

Disappointingly, I found nothing, even though these systems have been around and have been in Jamaica for years. They are becoming more complicated. The well-conceived Guardian Group blog which, by the way, includes skincare tips for the dry season, was the most useful. It deserves a shout-out for that reason alone. However, there is absolutely nothing about high-tech auto systems.

The insurance industry is also behind in the composition of its leadership team. There is a serious gender imbalance. Women play important roles in member companies. The male to female ratio in IAJ’s executive team is 8:1. This excludes the corporate secretary, a post normally occupied by a woman. In contrast, Jamaica’s cabinet has 10 men to four women.

I will rely on overseas sources to answer your question.

“Many drivers looked at their car insurance with an air of resignation last year. After years of declines, the average premium was on the way back up, by an average of 8%. That frustration may be short-lived, however, due to the increasing influence of machines and automation in driving, which is set to save motorists hundreds of pounds in premiums,” The Guardian newspaper in the United Kingdom reported in May 2016.

“Insurer Swiss Re (a company that provides reinsurance for many local insurers) and technology group HERE have anticipated that there will be a huge decrease in car insurance premiums in the coming years as automatic crash-avoidance systems in cars reduce the likelihood of impacts. Premiums in the 14 largest car markets in the world are expected to drop by US$20 billion (£13.8 billion) by 2020 alone. At present, two versions of the same Ford Focus – one fitted with an automatic braking system that senses if there is going to be an impact, and one without – can command quotes that differ by almost a third, according to a survey,” the newspaper report said.

Three years later, another UK newspaper, The Telegraph, came to the opposite conclusion.

A different take

“Smart connected cars are pushing up insurance premiums. The cost of fixing sophisticated modern cars with high-tech driving assistance and expensive sensors has reached record levels,” it reported the Association of British Insurers (the IAJ equivalent) as saying. Car repair costs during the first quarter of this year reached £1.2 billion, the highest level since the organisation started collecting the data in 2013.

“Standard car parts such as headlights and windscreens are also becoming more expensive, with the cost of a headlamp on one popular vehicle rising by over 400 per cent, from £163 for the 2012-17 version of the car to £840 for the most recent model.”

Alex Davies writes and edits articles on autonomous and electric vehicles, aviation, and infrastructure for the American magazine Wired. He agrees with The Telegraph.

On January 29, 2020, Davies wrote: “American car insurance rates are going up, up, up. In the past decade, they climbed 29.6 per cent, to an average of US$1,548 in 2019 from US$1,194 in 2011. The surge, detailed in a new report from insurance shopping site The Zebra, outpaced both inflation (by far) and the increase in average car prices (more narrowly). And it came even as the rate of crashes has fallen year over year.

“A more surprising, counterintuitive culprit isn’t the wider world or the person behind the wheel but the car itself. It turns out that new features designed to keep vehicles in their lanes and out of trouble are contributing to rising insurance rates. That’s because the sensors that power those systems make cars much more expensive to fix when they do crash. Dent a steel bumper, and a few hammer blows get you back on the road. Smash one on a new car, and it could mean replacing a radar, a camera, and ultrasonic sensors, then calibrating them so they work properly. Replacing a cracked windshield now comes with the extra cost of having someone readjust any cameras that look through the glass.

“While some studies have shown the effectiveness of emergency braking, insurance companies haven’t yet seen enough evidence to justify a break in rates for most of these features. That’s not to say lane-keeping, parking assist, and the rest don’t work. They’re all relatively new, and the actuaries aren’t yet confident that their benefits outweigh the extra costs they incur to repair. Complicating the picture is the fact that each automaker offers its own version of each feature, and that drivers may not keep the systems engaged.”

A European made (non-high end) car was damaged in a collision in St Mary last year. Two front airbags were deployed. What was initially thought to be a $500,000 repair bill ended up costing nearly $2 million. Only 14 of the 40 replacement parts were locally available. Five items, two seat belts, two airbags and the computer system for the airbags, accounted for over one-third of the $1.1 million parts estimate.

These data support the arguments in the Telegraph and Wired articles. Exchange rate movements plus the fact that cars are not manufactured locally inflate repair costs.

On the other hand, if the market is competitive, as industry insiders and the Fair Trading Commission asserts, consumers can get price breaks for the high-tech features in their vehicles, if they decide to shop around.

Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com