The Challenge with Disrupting Car Insurance

A few years ago, when technologists first turned their gaze towards disrupting the insurance industry, the car insurance sector was the obvious first choice. The market size is significant — more than $200bn in the US alone — and it is often a consumer’s first foray into the world of insurance.

But despite holding the burden of first-impressions, the auto insurance industry has not adequately evolved and to say that this first experience for consumers is underwhelming would be an understatement.

Since car insurance is required by law many carriers have shown little interest in developing new and innovative products in this sector and larger carriers certainly aren’t incentivised to drastically reduce their premium income through the introduction of products like On-Demand coverage. InsurTech startups, by comparison, are focused solely on the customer experience and are seeking to deliver products they deem as ‘fair’ to an industry that is often seen as a rip off (until you have your first claim, of course).

The Disruption of Car Insurance

With all of this focus from startups, the disruption of car insurance industry and the demise of the large carriers is a theme often echoed in Silicon Valley; however, the insurance sector is proving more difficult to disrupt than Music, Retail or Taxis.

The first challenge facing would-be-disrupters are the regulatory hurdles imposed by the industry. The demands of these obstacles force many challengers opt to take the MGA approach which allows them to write their business on behalf of another, larger carrier.

By taking the MGA approach, the startup is able to build and deliver their product to the market, gain early clients, and quickly evolve their value proposition. It also allows them to improve their pricing model whilst leveraging the claims and reinsurance programs of their carrier partners.

Some startups using the MGA model are able to deliver better loss ratios (or claim to since their data isn’t required to be released) than their larger incumbents; however, startups who have built their own insurance company capacity such as Metromile, have yet to turn a profit and critics wonder if they ever will.

When looking at the future of the car insurance landscape it’s hard to imagine that technology will cause it to look drastically different in a decade.

But it will look different. And change happens quickly.

The true disruptive impact that technology startups have across all industries is their ability to empower to the unrepresented masses — those who have previously been at the mercy of the large, established corporations.

Old, clunky, frustrating services and experiences across every sector and industry are now being challenged as a potential areas for disruption and MBA educated executives are struggling to wrap their head around a world where owning the entire customer value chain is no longer the best path towards profit.

The insurance industry presents a complicated challenge since its core value proposition requires the future payment of claims — even short-tail insurance business looks significantly different than the business model of an Uber journey or Deliveroo food order.

Disruptive threats are driving change

Given the challenges with building a full stack insurance company from scratch I think it is highly likely that most incumbent carriers will still be around in a decade. However, I also believe that many will look very different.

Thanks to these startups, the customer has spoken. They want features like on-demand coverage, improved policy flexibility, clearer wordings and greater personalisation. However, the car insurance industry faces myriad threats and challenges that are all arriving at once and customer-centric product innovation is just one piece of an increasingly complex pie.

When looking at car insurance’s challenges, three critical trends jump out:

  1. Movement towards lower premiums

Customers seeking lower car insurance premiums will not come as a surprise to anyone who’s ever seen a TV ad break; however, a shift towards ‘on-demand’ or ‘pay-as-you-go’ coverage risks significantly lowering the premium pool required by these insurers to operate.

While telematic solutions and IOT promise to help reduce claims — and in fact they are doing that fairly successfully — they have also led to the significant increase in claims severity.

Fender benders were more prevalent 10 years ago but fenders and rear-view mirrors where cheap plastic then and could often be replaced for a few hundred dollars. Now with a multitude of sensors, LEDs, Lidar, and broader system integration, these same accidents, albeit fewer and further between, can easily cost several thousand dollars.

Industry experts expect that the overall cost of claims will continue to climb for a few more years before the overall decrease in accidents are significant enough to off-set the rising repair costs. In the meantime, insurers are left trying to reconcile customers’ increasing push towards lower premiums with rising claims costs.

Startups have an advantage in this area as their technical capabilities support the lower expense ratio to make these numbers work; however, whether that will be enough is yet to be confirmed.

Lastly, although On-Demand coverage is not yet pervasive enough to massively impact consumer buying behaviour, insurers who aren’t at least keeping an eye on this space and preparing how they’ll evolve could miss out on the future of the industry.

2. A shift in premium sources

The second trend that will be felt across the industry is the shift in who the buyers of car insurance actually are.

As the automotive industry also positions itself to be more consumer friendly the inclusion of insurance becomes one less point of inconvenience for new customers. Companies like Ford and Volvo are rolling out subscription services models that includes the price of everything besides gas. Repairs, Replacements, Tune-ups, and yes, Insurance, are all included in the monthly price which can even include upgraded models every couple of years. This, coupled with firms like Tesla including insurance in the price of their vehicles, highlights a significant risk to the insurance industry.

Instead of having a pool of millions of potential customers across the country and around the world, car insurers of the future may be dependent on winning a couple of large global contracts. In this environment only the insurers with the largest global balance sheets have the ability to compete and, even they, might be exposed to increasing premium volatility as these large, global contracts could represent a disproportionate amount of their written premium.

The process of underwriting a global portfolio of auto risks by manufacturer could also represent a fundamental shift in the current value chain — moving aggregation before pricing on its way to capital.

Waymo is leading in bringing driverless cars to the masses.

Lastly, as autonomous vehicles move closer and closer to becoming a reality there is continuous debate about how insurance would interact in the world of these driverless cars.

The biggest question — as far as the insurance industry is concerned — is about who would ultimately be responsible in the case of an accident (the manufacturer, the software company, the driver) and this allocation of fault will likely evolve over time. However, a critical component that shouldn’t be overlooked is the fact that the world of autonomous vehicles doesn’t support hundreds of car insurers and it is likely that there will be a few global insurers underwriting the software providers and a few underwriting the manufacturers.

In a world of autonomous vehicles personal liability insurance could remain a product in the market but it would likely provide so little premium that it would difficult to deliver a viable business on its own. Traditional insurers seeking to offer this type of liability cover would need to find other products to bundle it with in order to make the unit economics work.

3. Detachment of client base

The rapidly evolving car insurance landscape makes for an interesting thought experiment in its own right, but it is also essential to recognise the significant impact that the motor market has on the broader insurance ecosystem.

Source: CBInsights - Disrupting Car Briefing

As a compulsory product car insurance is usually someone’s first interaction with the insurance industry. As a result, it is the core product for most carriers who then look to cross sell myriad other products from homeowners to life to small commercial. If insurers lose this entry point to consumers they will need to rethink how they target consumers with their other products.

For many insurers, car insurance operates as a loss leader, a way to win consumers and then look to sell them other, more profitable products. Whilst some insurers may be happy to focus their efforts on traditionally more profitable business units, competing in a landscape without auto-insurance has yet to be fully tested. Will consumers be as price sensitive in small commercial and homeowners as they are with car insurance? Will they be more focused on valued added products?

The loss of the primary entrance point for most consumers into insurance doesn’t necessarily represent an insurmountable challenge; however, as the insurance industry undergoes a seismic shift, certain carriers will respond to this better than others.

The result will be new winners and losers and a landscape that may, in-fact, look very different than it does now.