In the first part of our series on shifts in the personal lines of insurance industry, we discussed the insurance industry's slow pace of change, especially when adapting to changing customer expectations. Evolving customer needs and advances in technology are significant drivers of industry shifts that often result in market disruptions, new products, or the creation of new business models.
In part two of our three-part series, we'll take a deep dive into these factors, with a focus on the automotive segment and what organizations should consider to keep pace and stay competitive.
Evolving Market Landscape, New Products and Business Models
The adoption of vehicle sharing and the increase in autonomous vehicles are anticipated to lead to a decrease in the auto insurance market size. Additionally, the emergence of telematics and higher levels of autonomous driving will make insurance risk pricing more dependent on usage data. These trends have contributed to products like usage-based insurance and parametric insurance products. The value chain will also continue to evolve. We will see market power shifting to those who control data and customer relationships, such as original equipment manufacturers (OEMs) and dealer networks. New businesses will evolve that specialize in data provisioning, or processing.
Here are the key trends in the market, products and business models:
- Vehicle Sharing: Shared mobility and emerging preferences of Gen-Z to share rather than own vehicles are expected to compress the personal auto insurance market over time. This will result in increased competition, especially as insurers look to reduce the portfolio-wide average age of drivers by competing to acquire Gen-Z customers.
- Impact of Autonomous Vehicles: With advanced driven assistance systems (ADAS) and autonomous vehicles (AV), liability shifts to the OEM/software provider and this portion of coverage moves from personal lines to commercial lines insurance. Improved safety in vehicles will also result in lower losses and eventually reduced premiums. More importantly, a substantial portion of the risk pool will be influenced by OEM and third-party participation in distribution, products, pricing and claims processes.
- Expansion of Usage-Based Insurance (UBI): Usage-based auto policies become mainstream. It is expected to grow at a compounded annual growth rate (CAGR) of 25+ percent.1 Growth in UBI comes as customers feel more comfortable sharing data in exchange for value. This will also give way to on-demand insurance for coverage durations of as little as an hour.
- Embedded Insurance: According to Embedded
Insurance Peer Group report, Embedded Insurance could be worth $1.5
trillion in gross written premium by 2032.2 Overall,
Embedded Insurance could account for around 16 percent of all
insurance distribution and, in certain P&C markets, could
account for 30 percent of distribution. Whether auto and home
insurance will also see the same level of success depends on the
value embedded insurance creates for the customer. It is currently
a convenience play, but when some of the expense
savings
--that are possible through embedded distribution--are passed onto customers, it may see rapid growth. Insurers participating in embedded insurance with distribution partners may have significant advantages in access to data, preferred pricing with participating repair networks and easier access to parts and expertise, all of which will result in lower costs – value that can be passed onto the customers.
- Ecosystems/Platforms: Convergence and consolidation trends will eventually lead to platforms and ecosystems where insurance service is one of the many diverse but related services being offered.3 An ecosystem is a network of interconnected organizations, services and technologies that work together to provide comprehensive solutions to customers in one integrated experience. Examples of ecosystems include Alibaba, Alphabet, Amazon, Apple, Facebook, Microsoft and Tencent.4 An expansive insurance ecosystem is yet to be established in the US, but large incumbents are working towards it, albeit with slow progress. Eventually we will see insurance and other related services bought and sold on financial services, risk and/or auto ecosystems and vice versa.
How Some Insurers Are Reacting to These Trends
These changing factors mean interdependency among players in the industry and adjacent industries is increasing and strategic partnerships are becoming more and more essential.
OEM-Insurer Partnerships:
- Tesla now underwrites auto insurance for its cars (started as an insurance broker, then to a fronting agency partner, and now an insurance subsidiary).
- Nationwide partnered with Ford, Chevrolet and Rivian to offer embedded insurance.
- Liberty Mutual partnered with Volvo. It also acquired Fetch's digital solution that allows auto OEMs and dealers to integrate auto insurance.
- Root partnered with Carvana.
- Volkswagen is also now an insurance broker. 5
Ride Sharing Company-Insurer Partnerships:
- Farmers, Liberty Mutual and Progressive partnered with Uber to provide driver and passenger insurance.6
- Similarly, Liberty Mutual, Progressive, Allstate, Mobilitas and State Farm partnered with Lyft.7
- Travelers partnered with Turo to provide insurance for auto renters.8
Ecosystems:
- State Farm has expressed ambitions to create an ecosystem with connected cars, connected homes and connected self.9
- Elsewhere outside of the U.S., Discovery (South Africa)10 and PingAn (China)11 built successful ecosystems providing multiple, albeit adjacent services to their customers
On-Demand Insurance:
- London startup Cuvva allows you to pay for just what you use based on the exact number of hours or days you drive, offering a unique competing value proposition to Metromile. You can insure yourself to drive in any vehicle — such as a friend's car — for durations as little as a single hour. Available only in the UK, this is currently a niche with low market penetration.12
Best Practices to Ensure Success in the Market
Organizations need to consider all routes to strengthen their position in the market, including partnerships, mergers and acquisitions (M&A) and potentially launching new data-driven products.
- The impact on the personal line auto insurance market due to ride sharing and autonomous vehicles will impact personal lines only insurers. It is important for those insurers to rethink their acquisition strategy, consider market expansion and growth adjacencies.
- Participation in embedded distribution is compelling and insurers should strongly consider it. OEMs and dealer networks are well positioned to offer embedded distribution and therefore, insurers should proactively establish partnerships with auto OEMs and other players in the ecosystem including AV software providers, repair networks, ridesharing companies and EV battery firms. First movers will enjoy significant competitive advantages.
- Insurers should also pursue an M&A strategy to augment new capabilities and products, such as parametric insurance for flood coverage. In addition, an acquisition strategy should focus on Insurtech companies that have built viable platforms but lack robust risk assessment and management capabilities.
- Adopt loosely coupled technology architectures, take a cloud-first approach and eventually implement an API platform. Open technology architecture allows the insurers to be able to act with agility to participate in emerging ecosystems or quickly adopt new business models in the market.
Traditional revenue streams are being challenged for those insurers whose bulk of revenue comes from the personal lines auto insurance market. There is increased pressure to not only differentiate themselves and protect or capture market share, but to also adopt a clear partner strategy and channel strategy to ensure long-term success in the market. Acquisitive growth and adjacencies should also be considered.
Footnotes
1 "Usage-Based Insurance Market." Allied Market Research, www.alliedmarketresearch.com/usage-based-insurance-market.
3 "Convergence and Insurance Ecosystem." Insurance Thought Leadership, www.insurancethoughtleadership.com/ecosystems/convergence-and-insurance-ecosystem/.
4 "Insurance Beyond Digital: The Rise of Ecosystems and Platforms." McKinsey & Company, www.mckinsey.com/industries/financial-services/our-insights/insurance-beyond-digital-the-rise-of-ecosystems-and-platforms.
5 "Automakers Build New Insurance Future." Insurance Thought Leadership, www.insurancethoughtleadership.com/auto-insurance/automakers-build-new-insurance-future/.
6 "Insurers Unprepared for Climate Change Risk: Survey." Insurance Journal, 7 Jan. 2020, www.insurancejournal.com/news/national/2020/01/07/553730.htm.
7 "Lyft Driver Insurance." Lyft, www.lyft.com/driver/insurance.
8 "Turo Car Rental Insurance." Turo, www.turo.com/us/en/car-rental/united-states/insurance.
9 "The State Farm Vision: Ecosystem Capabilities for the Insurer of the Future." Carrier Management, 28 Nov. 2023, www.carriermanagement.com/features/2023/11/28/255944.htm.
10 Peverelli, Roger. "The Discovery of All Ecosystems." LinkedIn, www.linkedin.com/pulse/discovery-all-ecosystems-roger-peverelli/.
11 "How Ping An Went from a Traditional Insurer to Become a Tech Giant." IMD, www.imd.org/news/digital/updates-how-ping-an-went-from-a-traditional-insurer-to-become-a-tech-giant/.
12 "7 On-Demand Insurance Start-Ups Influencing the Market." Risk & Insurance, www.riskandinsurance.com/7-on-demand-insurance-start-ups-influencing-the-market/#:~:text=London%20startup%20Cuvva%20allows%20you,little%20as%20a%20single%20hour.
Originally published 22 May 2024
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.