Keep It Simple, Allstate

A report in the Wall Street Journal last week dives into the insurance industry’s quandary over the anticipated onset of self-driving cars that might significantly and negatively impact the volume of claims and, ultimately, mitigate the need for car insurance altogether.  The report is simultaneously a source of alarm and relief as vehicles capable of driving themselves are not expected to arrive on highways for a decade or more – meaning there is ample time to gather data and prepare.  Or is there?

https://tinyurl.com/zhc9qan - "Driverless Cars Threaten to Crash Earnings" - WSJ

The report notes Allstate’s creation of a division, called Arity, to aggregate the company’s various telematics-based programs and data gathering efforts.  State Farm is described as working with the University of Michigan’s Mcity program studying self-driving cars.  Liberty Mutual is noted for offering discounts to consumers to insure cars with safety features such as automatic emergency braking.

KPMG and Deloitte are quoted in the report forecasting dramatic declines in accident rates and a halving of the size of the auto insurance industry, respectively, in a decade or two.  The Insurance Institute for Highway Safety notes the attraction of safety systems proliferating on cars – such as blindspot detection, lane keeping, automatic emergency braking – but bemoans the inclination of consumers to disable these systems and their annoying alerts.

State Farm, Allstate and Liberty Mutual are three of the top five car insurance companies in the U.S.  Unmentioned in the Wall Street Journal report is Geico.  Geico is presumably gathering the same information and drawing the same conclusions as its market leadership rivals, but Geico has thus far steered clear of telematics-based insurance offerings – hewing instead to an ad-fueled, discount driven product that keeps the value proposition simple as the company has swelled its portfolio to the second largest in the U.S. behind State Farm.

It’s important to note that the other market leader, Progressive Insurance, may lead in telematics-based policies in the U.S., but telematics-based insurance has not vaulted Progressive to market leadership.  Another measure I am not considering is profitability, which is where the number crunchers earn their pay – kicking out or jacking up the rates on the higher risk drivers.

Allstate’s Arity division is described as employing 200 data scientists to pull on all data sources to better understand the impact of proliferating vehicle connectivity and safety systems, ride hailing and car sharing services, vehicle-to-vehicle communications and, ultimately, self-driving car systems.  The only problem is, Geico leapfrogged Allstate with far more direct and old-fashioned marketing means.

The question is whether Allstate can leverage technology and data science to gain an advantage in a market facing long-term decline and irrelevance.  The future of auto insurance will change as safety systems continue to proliferate.  Ten car companies selling cars in the U.S. have already committed to deploying automatic emergency braking as a standard feature beginning in 2018.

The challenge facing the data jockeys remains proving a negative: Can the actuaries and statisticians prove that a technology like lane keeping or blindspot detection prevented a crash?  While the scientists noodle that one out, Geico keeps soaking up new customers.

Dollars and cents are determining the winners in the evolving car insurance business.  Aggregators like Confused.com/Compare.com are proliferating and taking charge of the customer experience.  As long as consumers can find a cheaper rate from an aggregator, price will remain king.

Last year, I switched my car insurance policy from State Farm’s DriveSafe&Save telematics offering to a non-telematics Liberty Mutual plan and nearly cut my rate in half.  A year later, Liberty Mutual upped my rate 10% and I switched to Geico and saved several more hundred dollars.

You don’t need a slide rule to see that the insurance industry is a hot mess of state-level regulation and confusing rating schemes and requirements.  The aggregators “get it” and do all they can to take the side of the consumer and simplify the on-boarding process - without actually taking ownership of the customer.

How confusing is the car insurance business in the U.S.?  It’s sufficiently complex and insurance companies themselves are sufficiently obtuse and technologically unsophisticated that Google gave up on its brief car insurance foray last March after briefly going live in California.  Too many regulatory commissions, too many slow-footed insurance partners to enable a rapid scaling proposition.

The long-term outlook is for car companies to facilitate the car insurance decisions of consumers.  Companies such as Ford and GM are leading the way in integrating insurance marketplaces into their telematics offerings.  This is the future.

Volvo has gone so far as to suggest that car companies will themselves provide insurance – something already emerging from the financial services divisions of companies such as Volkswagen and Toyota.  Allstate may have ambitions to leverage its existing data resources into a market leading position, but car companies are serving notice that they will have something to say about insurance leadership and ownership.

My advice to Allstate is to look to Geico and keep it simple and, longer term, bear in mind the words of Esurance director of marketing strategy Haden Kirkpatrick, speaking at the Future Connected Car event in Santa Clara earlier this year.  “Consumers should only have to pay for insurance when their hands are on the wheel.”  That's where we are headed.

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