Insurance - The Next Generation

In an accident? Pelted by a freak hailstorm? Hit a deer? The universal answer to all of these problems has for over a century been car insurance. The first car insurance policy was taken out by a Dayton, Ohio resident in 1897, covering the owner in case the vehicle damaged property or hurt/killed an individual. Since then, the car insurance market has ballooned into an enormous industry, with the US car insurance market valued at nearly $400 billion in 2023. Car insurance rates have grown steadily with the increasing price and complexity of new vehicles. With average new car prices reaching a staggering $47,000 in 2023, it is no secret that premiums are on the rise. Cars now have hundreds of sensors collecting the data required for advanced mobility and connected car features. No longer does a simple fender bender cost a few hundred dollars to repair. Although these sensors have undoubtedly led to a reduction in the number of accidents, total repair costs across all accidents are rising. Now when there is a collision, dozens of sensors/cameras may have been destroyed, skyrocketing the price into the several thousand dollar range. In addition, supply chain issues have led to delays in repairing vehicles and in higher replacement parts costs, leading to insurance company losses. Independent and OEM-based insurance companies are seeing green due to the overall size of the market, but the business model isn't so simple. Oversaturated market space, rising repair costs, and challenges around privacy are providing surprise roadblocks to profitability and success. The key question in industry minds is this: how does next generation car insurance become a profitable and customer-centric business?

The cost to build cars has increased dramatically since the turn of the century. In the last 25 years, cars have functionally evolved into computers with wheels. In 2000, only the highest end luxury vehicles were starting to see simple head units integrated into the center dashboard. Now, many cars have screens spanning the entire dashboard, containing vital information such as the tachometer, speedometer, radio, and navigation systems. All of these technologies require constant data receipt and transmission, and the average new car has around 1500 semiconductor chips to handle these intensive processes. Some cars have up to 3000. Coupled with all of the other technologies needed to enable partial self driving, sonar, 360 cameras, and EV charging, car insurers have to account for much more than the mechanical components that propel a vehicle forward and turn it. Dealing with thousands of dollars in computing technology has logically increased premiums and squeezed profit margins for insurance companies using traditional algorithms to charge customers. As a result, many car insurers have turned to utilizing these advanced technologies to calculate driver scores and other methods of maximizing profitability. However, if not done correctly, next generation insurance is deceptively difficult.

Last month, it was revealed that GM’s in-vehicle infotainment service OnStar was, in partnership with software company LexisNexis, selling consumer data to insurers without their explicit consent. This information, mainly concerning data used to create driver scores, was being used to calculate car insurance rates and unknowingly affecting premiums, causing some drivers to potentially pay significantly more for insurance and some drivers to pay less.? In an effort to offset rising vehicle complexity and cost, consumer trust was broken, calling into question the viability of “pay how you drive (PHYD)” usage based insurance. GM has suspended this data-sharing program, at least for now. Moreover, even before this recent revelation, OnStar Insurance, GM’s homegrown insurance offering, has struggled to gain significant traction. Facing issues with distribution and conversion rates, OnStar Insurance has struggled to match the profitability of similar services such as Tesla Insurance. And newer providers like Amazon and Intuit have discontinued their insurance services due to disappointing sales figures. Though this news appears gloomy and somewhat foreboding, it actually presents an opportunity for Next Generation Insurance (NGI) providers to create policies that customers are excited to pay for.

New companies are working hard to better encapsulate this new model. Using edge computing to conquer the task of consumer privacy and ADAS sensors to contextualize driver behavior, some insurance providers are able to calculate unique driver scores that are better at assessing driver risk while avoiding the transfer and distribution of sensitive user data. Going beyond the simplicity of pay how you drive insurance, which calculates a score based on factors such as hard acceleration and braking, this next generation technology is able to identify components such as distracted and reckless driving and to refrain from actually punishing drivers for performing safe maneuvers such as hard braking to avoid a potential accident caused by another motorist. Coupled with a focus on privacy and keeping private data on board the vehicle, this approach to insurance presents a viable path forward for next generation insurance providers, signaling a new approach as providers continue to look towards the future.

It is a near certainty that vehicle costs will continue to increase for several more years as mass EV adoption and an expectation for ever more advanced in-vehicle features takes hold of the automotive industry. Cost increases will continue to raise premiums, as insurers are forced to incorporate higher repair costs into their rate calculations. Next Generation Insurance can provide the answers that automakers, consumers, and providers are looking for, addressing consumer expense and privacy concerns while also enabling a profitable business model.?

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