Car Insurance Too Damn High (Part 1)

I don’t care who you are.  I don’t care where you live.  I don’t care how you drive or what you drive.  I can guarantee you are paying too much for car insurance.

There’s a reason most people hate car insurance companies.  The pricing model is broken or rigged, depending on how you look at it.  In spite of all the most sophisticated actuarial models known to mankind and increasingly comprehensive customer information, insurers have an imperfect model of driving risk and apply it imperfectly to insuring your car.

Part of this is the result of a global regulatory regime that is intended to shield consumers from the industry's worst natural instincts as well as to shield protected classes – minorities, women, financially disadvantaged customers – from discrimination.  But the outcome is rating models which, in today’s world of Big Data, look like nothing much better than guesswork.

Another reason the rates look like guesswork is that insurance companies are actually built to maximize their profits not your discount.  That’s probably why the industry is so highly regulated.

Again, the result is insurance rates that never seem to correlate with your actual risk.  It may be that your rate actually correlates to your level of tolerance or intolerance for shopping around for insurance. 

Of course, the process that insurance companies use to test or take advantage of your sensitivity or lack of sensitivity to price is described as price optimization which is illegal.  But that doesn’t mean it isn’t happening.

The further result is that the largest insurers choose or may be forced to spend millions of dollars on advertising to convince you, the customer, they have the best rates – while the industry small-fry, with limited or no marketing budgets, can undercut even the best offers from the big boys.  It costs lots of money to refine existing underwriting models and price insurance properly, but the motivation is lacking. 

Remember, insurance companies are tuned to maximize profits, not discounts.  The largest insurers are spending more money on marketing than they are on refining their underwriting.

Insurers are trying to find ways to leverage usage-based insurance, which is meant to hone rates more precisely.  But the big joke here is that the typical UBI program is offering a discount in the 5%-15% range in spite of the fact that the best behaving 10% of drivers probably are entitled to a 70% discount on their insurance, according to the industry's own research.  That top 10%, and you may be one, never or rarely crash or file claims.

In fact, the top 10% probably only need to insure themselves against the behavior of other drivers, but they will NEVER get the full 70% discount that the data suggests they are entitled to.  The fact that these safe drivers will never get close to the 70% discount to which they are entitled is at the core of the current UBI fantasy.

UBI is car insurance individualized to your driving behavior – which sounds like a great deal if you are a “good” driver as long as your definition of a good driver doesn’t vary from your insurance company’s definition.  But you won’t have an opportunity to debate the issue once you are participating in such a program.

The dream of usage-based car insurance tuned to your personal driving behavior is a dream deferred.  Rather than delivering a personalized experience which might include increased engagement with the driver-consumer, insurance companies, like Progressive, have created low-cost, low-overhead, low-engagement platforms with a take it or leave it ethos. 

And no insurance company is offering the full spectrum of discounts – 5%-70% - that really ought to be available.  In fact, when UBI programs are launched, non-UBI rates are generally raised.  So the insurer is ingesting driver consumers who are almost guaranteed to be worthy of 30%-70% discounts based solely on their willingness to participate in such a program, but only offering a fraction of the discount to which they are likely entitled – and they are raising rates for the rest of the insured base.  It’s a win-win for them and lose-lose for consumers.

In fact, some UBI programs, like Progressive's, have been adding surcharges for poor driving.  So, in reality, the current UBI programs aren’t progressive.  These programs are regressive.  They are a thin veneer, a variation on the old model of guesswork underwriting – ie. profit optimization.

Of course, UBI is only one small part of the problem.  The bigger underwriting fallacy is the blind insuring of family cars with multiple drivers or cars that are intended for personal and business use.  And in a world of shared use or automated driving the appropriateness of existing insurance models are entirely inadequate.

The idea of UBI is promising.  But it’s time for an approach to UBI which takes more complete advantage of existing technology and new vehicle ownership models to deliver a truly personalized insurance experience. 

First of all, in many regions of the world the underwriting of insurance for a car is a blended affair taking into account the car and the potential drivers of that car.  There is no effort made to identify the proportional driving activity of all the potential drivers.

It may so happen that a family pays elevated insurance rates for teenagers who have licenses but who aren’t allowed to drive the family car – or only rarely.  What is missing is a process for determining who is driving, when, how often and for what purpose?  And, in a post-Uber/Maven world, when is the vehicle being driven by a non-family member and when is the car being used for business and/or commercial purposes.

Car companies have the technology today to not only enable car sharing or the use of the car for ride hailing or delivery services, but also to identify the driver.  The time has arrived to enable insurance platforms that provide for fractional insurance coverage or individualized cover taking into account the multiple drivers and variable use cases of the vehicle.

The challenge for insurance companies is that it costs money to develop more accurate and fair underwriting models and, of course, it is antithetical to the maximization of profit.  If consumers paid what they really ought to be paying for car insurance, insurance companies would be a lot less attractive to investors.  Or would they?

An insurance offer that provides for different drivers and different uses and is appropriately aware of the way the vehicle is being used is one that brings with it the potential for greater transparency for the consumer.  Along with the transparency of the offer, the insurer or insurers could provide for consumer control of and access to their data, thereby establishing greater trust.

So, in the end, the millions of dollars necessary to enable such an appropriately priced platform will inevitably be rewarded with higher levels of customer satisfaction, lower levels of customer churn and a new level of customer engagement.  Access to more detailed vehicle usage information will enable insurers to develop new ad hoc, on-demand or dynamic (variably priced in real-time) products and services to extend car insurance into the emerging world of shared and automated vehicles – ie. per drive, per vacation coverage.

One of the biggest challenges facing car companies is finding ways to encourage customers to use safety systems and, in particular, to keep them turned on rather than disabling them.  This is an area where car companies and insurance companies could collaborate to not only integrate the identification of the driver as part of a connected car system, but also to provide dashboard-delivered messages regarding turning on and using vehicle safety systems.

It’s worth noting that survey after survey shows consumers prioritize safety in their vehicle purchases.  A properly outfitted car with safety technology and telematics connections could be crafted in such a way that dynamic, real-time insurance discounts were tied to individual drivers and the active use of integrated safety systems.

In the end, insurance companies ought to be able to align their profit maximization with the goal of creating safer connected cars with sophisticated collision avoidance systems and driver identification technology.  That’s a price optimization scheme even a regulator could love.

Roger C. Lanctot is Associate Director in the Global Automotive Practice at Strategy Analytics.  More details about Strategy Analytics can be found here: https://www.strategyanalytics.com/access-services/automotive#.VuGdXfkrKUk