The UK Car Finance market has grown aggressively over the last few years, fuelled in part by innovation and a growing ability to serve the sub-prime market.

Car-buyers have a number of options now available to them if they’re unable to be a cash-buyer – including Hire Purchase, Personal Loan and the newer Personal Contract Plan.

But flexibility on purchase options is only part of the reason for the strong growth in the market.  Car Finance companies have also embraced technological innovation to help them broaden their market into the sub-prime sector – i.e. those customers who have an impaired credit history and won’t be able to access finance from the high street banks at their leading rates.

The sub-prime lending market has always been eyed with both desire and caution by finance providers – on the one hand the sub-prime market offers the ability to charge higher rates of interest, on the other hand, the sub-prime borrower market, by its very nature, carries with it a high risk of default. Get the model right and a lender can make handsome profits, get it wrong and the bad debt rates can force a lender out of business.

The car finance market is slightly different to the personal loan market in that during most of the finance arrangements available, the finance company technically retains ownership of the car so can repossess the vehicle if things go wrong with the loan repayments. Traditionally though that was easier said than done – finding the car when the borrower knows the loan has defaulted may be tricky.

The introduction of technological solutions have helped finance companies not only track and locate vehicles but also ‘encourage’ the borrower to keep up the payments under their finance plan.

Immobilisers are often fitted to vehicles, particularly those financed in the sub-prime sector – i.e. those that present the highest risk of the borrower not keeping up the repayments – and they’re clever pieces of kit. Every month when the finance payment is made the borrower will receive a unique pin code to enter into the immobiliser. Fail to make the payment and enter the correct code, the immobiliser will kick in and the car won’t start. What’s more, the Immobiliser will also act as a tracking device making it much easier for the finance company to repossess the vehicle.

So at a stroke the finance company has a) heavily incentivised the borrower to keep paying (or their car won’t start) and b) made it much easier to recover the security for the finance.

The sum of which means that defaults and write offs are down, so the finance companies can be a lot more confident opening up to the illusive sub-prime credit market. Allowing more people to finance a car purchase than would previously have been able to.

All well and good? Well, certainly from the point of view of the finance companies (who book more loans and keep defaults to a profitable level) and the dealers (who get to sell more cars). But what about from the customer’s point of view?

At face value it looks to be good news for the customer, particularly those in the sub-prime space, as more customers are able to access a finance product for their car purchase. But, if the default rates are lower and repossessions are lower (and therefore write offs) – are the interest rates also lower?

A quick look at the top ranking sites on Google for ‘Car Finance’ found a Representative APR of 49.6 for applicants with bad credit – for a £5,000 loan over 4 years that’s a total interest of £5,236.

The interest rates charged cover the costs of providing the finance, including off-setting the loans that ‘go bad’ and are not repaid, and providing the lender with a return for its investment. The rate charged can be roughly translated into the risk represented by the borrower. The lenders have found technological solutions to reduce the risk of defaults and write-offs but still point to a borrower’s credit history to determine a level of risk – which justifies the high interest rates.

There is no regulation forcing a direct correlation of profit levels and interest charged but as we know, a highly profitable sector in financial services quickly attracts profiteering companies eyeing a quick (or large) buck. To keep this growing market buoyant but sustainable the lenders will need an element of self-regulation (and self-control), perhaps forgoing some of the bigger short term gains and passing on some of the profit to borrowers in the form of reduced rates.

(Source: Talk Loans)

By Paul Davies, head of business diversification, Audatex UK

You don’t have to look very far to see that autonomous vehicles are driving the technology news agenda. Pardon the pun, but it’s true. From Tesla to Google, Apple to Uber – there’s been an explosion of interest in the automotive industry, with big players from different sectors trying to muscle in on the act. Last year, there were 1.5 million cars sold in the UK already equipped with the necessary technology to be autonomous. Research suggests that by 2025, 25 per cent of the UK’s cars will be autonomous, a number that will increase to 50 per cent by 2040.

Furthermore, a little known fact is that the UK is one of the few European countries that decided not to sign the Vienna Convention on Road Traffic in 1968, which states drivers must be in control of their cars at all times. This convenient gap in regulations has left the door wide open for the UK to lead the way when it comes to autonomous test drives, which are already taking place all over the country. There is no doubt about it: Driverless cars are going to shape the world’s automotive landscape over the next few years, something that will undoubtedly have a massive impact on the insurance industry.

At a recent insurance industry event we hosted, one of the speakers - Paolo Cuomo of Charles Taylor/InsTechLondon - described the moment his 10-year-old daughter explained that neither she, nor her little brother need to learn how to drive. Her reasoning was that driverless cars will soon be able to take them everywhere they need to go - like a driverless (and thus relatively cheap) taxi service. I remember starting lessons as a teen, feeling overwhelmed by the sense of power and responsibility I felt sat behind the wheel. Getting my license required hours of revision and practice, to make sure I possessed the reaction skills, awareness and attention to detail needed to safely navigate a car on the road.

As driverless cars become the norm, younger generations may develop this perception that autonomous vehicles are safe. If that is the case, people may shy away from learning to drive all together – instead relying on technological developments in driverless vehicles, and opening up the idea that cars will soon become ‘chauffeurs’. Given that autonomous vehicles are still far from fail safe when it comes to accident avoidance, the industry does have a bit of time to work out how best to address that changing environment.

What will car insurance in the future look like?

As an insurer, what would you do if someone came to you and asked for an insurance policy when they have a fully autonomous car, have a licence, but have never owned a manual operated car before? How do you calculate what their premiums should be? They might assume that having a driverless car would automatically reduce their premiums to a minimum, but how would that change if they had previously owned a manual car before? Research shows that young drivers (16-19 years old) are a third more likely to die in a crash than 40-49 year olds. Because of this additional risk factor, young drivers find their excitement at passing and getting their first car comes screeching to a halt when they see how much insurance will cost them. Do industry statistics like that count, or individuals driving experience count when it comes to insurance premiums and their choice of car in the future? These are the kinds of questions we need to answer as an industry.

If driverless cars take off, we should also be asking ourselves what exactly we are insuring. In the event of a crash, it’s difficult to pinpoint where fault lies - whether it’s the car manufacturer, the software provider, or the passenger?

This question of ‘Who?’ will actually need to be opened up to a much broader field – one that goes beyond purely the automotive insurance industry. With the Internet of Things (IoT) getting bigger and more diverse, it’s only a matter of time before we see a blending of the home environment and the car. Just like how life insurance premiums differ depending on your lifestyle, I can already see the day where insurers will move from insuring possessions to insuring people and the ‘things’ they interact with. And all insurance they take out - whether home, phone, travel, pet or car - will depend on the person and their lifestyle.

This is great news for the consumer, as it flips the current system on its head. No longer will they need to look on countless comparison sites to find the best deal, but rather insurers may end up competing for their business. For example, if they exercise three times a week, drive safely, leave all their valuables indoors with a premium smart security system and only spend holidays in Iceland (the safest country in the world), then they are a safe bet for insurers and at the top of their wish-list. If customers can provide the data proving they have a ‘virtuous’ lifestyle, then this power shift will be an interesting one to watch unfold.

As discussions around driverless cars become more frequent among insurers, these are just a few of the topics that will be at the forefront of their minds. From assessing legal implications, to thinking about the apportioning of blame - the questions are endless. It is up to the insurance industry as a whole to come together, ask these questions, discuss them at length and come to ethical, logical conclusions. It’s not just up to us - consumers will no doubt have a loud voice when it comes to how they interact – and we all need to make sure we listen.