With the ever-changing and ever-growing factors that are taken into consideration when calculating fair and profitable rates, underwriters do not have an easy job these days. Underwriting gap insurance seems to change on a daily basis, and factors that never existed in past years are starting to lead the pack when determining accurate rates.
Performance of gap insurance has seen a significant decrease this year from a profitability standpoint. So many factors come into play. The rate of accidents has steadily increased in direct proportion to the number of people distracted by hand-held devices, as well as the increase in the number of miles being driven in recent years. Not only have there been more claims filed, but the severity of damage has also risen as the depreciation of certain vehicles has increased, driving up the costs of claims reimbursement. This, along with the ever-rising cost of automobiles and the higher cost to repair their damages have also become contributing factors in finding the perfect balance between fair rate assessments and profitable business practices in recent years. This year alone, the average price of a new vehicle is $31,099 which is a record high. Higher priced vehicles make the need for gap insurance more attractive, but the frequency, predictability and cost of accidents in these vehicles make determining risk and rates all the more tricky.
And because price increases in vehicles are reaching an all time high, consumers are also lengthening the term of their loans (up to 69 months this year), which is dragging out the time it takes to pay off the loan. As pay-off times increase, so does the gap between what is potentially owed and what would be reimbursed from gap insurance if an accident occurred. From an underwriter’s perspective, these factors are hindering profitability and creating more outliers that affect the underwriting process.
As technology advances, new tools and resources to make underwriting more predictable and manageable are on the horizon. The ability to collect real-time data through smart devices, for example, is giving underwriters a brand new perspective on behavior-driven models. However, as changes in technology rapidly increase and the cost for new, advanced tools underwriters have access to rises, staying ahead of the game will continue to be a challenge. While the advances in digital tools is constantly evolving, the pressure to collect, combine and find the perfect mix of data to provide accurate, personalized and real-time analysis will require vigilance and continuous adjustments to remain relevant and valuable.