Even though Metromile was groundbreaking with its pay-per-mile insurance, it certainly wasn’t the first to provide usage-based cover. In fact, the earliest documented paper insurance policy, a commercial policy, dated February 13, 1343, covered 10 bales of linen on their trip from Pisa to Sicily on the Santa Catalina. It was a Pay-Per-Use policy on a temporary shipment of cargo —right in the midst of the Italian Renaissance.
Fast forward 673 years and we are entering an era where usage-based insurance and Pay-As-You-Go (Drive-Live-Travel-Ship-And More) coverage is coming into vogue. The big difference with this Renaissance, however, is that technology and insurance coverage is unlikely to trend back toward aggregates and is highly likely to trend permanently toward individualized, contextualized, point-in-time based, data and analytics based pricing and use. There’s no going back … only forward.
If the sharing economy with collaborative consumption expands, the on-demand model continues to grow, and the pay-as-you-use model continues to create innovative options, then it has long-term, dramatic insurance implications — and almost all of them are positive when looked at in the light of InsureTech advancements. So, let’s briefly consider what usage-based insurance means to consumers, what it will do for insurers and how insurers need to prepare their enterprises to take advantage of it.
The Consumer and the Economics of Pay-As-You-Use
Pay-As-You-Use is a common economic principle, couched in today’s technology solutions. The only way it becomes profitable is for the consumer to see the benefit of variable use, the ease of use and variable expense. When Metromile introduced Pay-Per-Mile coverage for drivers, it naturally appealed most to low-mileage drivers who felt that they could now be treated fairly. They benefitted from less wasted premium dollars and they were rewarded with a personalized experience that made them feel known. (Metromile even goes so far as to warn individual San Francisco drivers about potential parking tickets during street cleaning days.)
Today’s consumers have constructed, through their preferences, a digitally-savvy, relationship-valuing, on-demand, sharing economy. AirBnB, Zipcar and Snapgoods are turning wasted downtime into productive uptime and revenue. These companies and others have transformed the mobile device into a powerful marketplace of options with stellar and simplified ease of use, standardized quality of service and transparency of price. These same trends will drive some consumers to only do business with those who can provide usage-based coverage.
The Insurer and the Economics of Pay-as-You-Grow
Insurers may lament that they are losing premium when the need for insurance is not in use, but that isn’t actually the case. In most cases they are just lowering premium at times when there is very little or no risk … the basic fundamentals of insurance. InsureTech startups are providing ideas to help insurers turn the sharing economy into new market opportunities, revenue and profits. Digital connectivity, relevant data streams and new product models will continually allow insurers to prove their pricing and help their customers lower their risk.
The irony of the insurer discomfort is this: Many insurers are taking advantage of the same Pay-As-You-Use principles as consumers themselves. They are sharing system solutions with cloud-based technology. They are paying as they grow, with agreements that allow them to pay-per-policy or pay based on premiums. They are using data on demand relationships for everything from medical evidence to geographic data and credit scoring. They use technology partners and consultants in an effort to not waste downtime, capital, resources and budgets. They are rapidly moving to a Pay-As-They-Use world, building Pay-As-They-Need insurance enterprises. This is especially true for greenfields and startups, where a large part of the economic equation is an elegant, pay-as-you-grow technology framework. They can turn that framework into a safe testing ground for innovative concepts without the fear of tremendous loss, while having the ability grow if the concepts are wildly successful.
The Window of Opportunity
It’s open again. The window of opportunity is open to insurers that wish to prepare their business models, products, processes and systems to embrace the Pay-As-You-Go culture. In a recent Majesco Thought Leadership report on insurance consumers, we found that consumers are far more interested in receiving a fair price than they are in gaining the lowest price. We also found that across all generational groups, auto insurance based on miles driven showed that 30%-50% of the surveyed respondents were willing to look at Pay-Per-Mile auto insurance and a similar percentage were interested in on-demand insurance for a specific event, item or time of day across all generational groups and led by Millennials. Each of these jumped to 60-80% when the “swing group (those that could shift) were added. (See The Rise of the New Insurance Customer for more information.)
The statistics are stunning, considering that those respondents are all current insurance customers — willing to stay or switch based upon their feelings of fairness, service, value, and need. Insurers that aren’t already preparing, need to prepare now … and quickly. There is no question that the convergence of consumer opinion and the innovative business models and capabilities of InsureTech will either steer consumers toward an insurer or away from it based on the insurer’s ability to accept non-traditional, tech-enabled products. Just look at the high interest and investment by reinsurers and venture capital firms in companies like Lemonade, Slice, Root and TROV … and the buzz and excitement their brands are generating in the marketplace.
Preparing isn’t terribly difficult, but it requires a look at long-held insurance assumptions … business model, products, processes, and systems that may be outmoded and built for a previous era and generation. How does a quoting engine handle a sporadic driver? How does a policy administration solution handle coverage that may turn on and off with a switch, or coverage that may only have a duration of two hours? Is an insurer’s data warehouse prepared to handle the data deluge of millions of telematic devices? For some insurers, these questions may seem like tall hurdles to jump over, but the answers are well worth the time and investment.
InsureTech is proving its potential by fueling innovation and disruption to the insurance industry, through new technology startups … and insurance and MGA startups. S&P even noted in a recent report that InsureTech has a complementary place in the traditional insurance world, despite remaining uncertainty in the industry about how it will function on a wide scale. If you prepare for new insurance models, such as Pay-On-Demand, Pay-As-You-Use, or Pay-As-You-Need, you will be moving your organization toward the place where consumer needs, expectations and demands are heading — particularly with the new generation of Millennials and Gen Zs that are embracing digitally superb, on-demand, sharing economy options in all parts of their lives.
It is the dawn of the insurance renaissance. Digitally-connected, innovative and analytically-informed insurers will thrive there. Those who are determined to focus on the customer will grow there. Preparing your business and the underlying systems keeps the windows of opportunity open and the breeze of market potential flowing into a healthy organization.