The Real Threat to Auto Insurers

Auto makers have repeatedly tried to capture more of the downstream revenue related to car sales and are now taking dead aim at insurance.


For decades, executives at auto makers have complained about all the revenue and profit they create for others but don't get a taste of themselves. The manufacturer generates, say, $3,500 of gross profit on the sale of a $30,000 car while creating far larger opportunities for others -- the commission paid to the dealer, plus revenue from repairs, service, insurance and more.

Auto makers have repeatedly tried to capture more of the downstream revenue related to car sales and are now taking dead aim at insurance. There's reason to think they'll make inroads, too, because insurance is increasingly based on data on driver behavior -- and auto makers have easy access to all that data.

Toyota recently became the latest manufacturer to announce an insurance offering, joining Porsche, Ford, General Motors, Tesla and several others. While traditional insurers need to get drivers to install dongles to monitor their actions behind the wheel or, increasingly, build systems around drivers' smartphones, manufacturers have a raft of sensors already built into cars and just need permission to use them for insurance purposes.

The spread of 5G and increasing power of so-called edge computing make it much easier for manufacturers to monitor driving behavior. Edge computing lets behavior be monitored and evaluated by increasingly powerful processors in the car itself -- at the edge of the computing network, rather than having all the data be transported back to a central data-processing center -- and the rollout of high-bandwidth 5G mobile networks allows for robust, high-speed connections between manufacturers and their products.

Manufacturers can also save on commissions and advertising because they can embed an offer of insurance into the auto sales process, when the car buyer needs to get insurance somewhere and is demonstrating trust for the manufacturer.

Car makers also gain in ways that insurers can't. Tesla, in particular, has talked about taking what it learns about accidents and reflecting that knowledge in the design of future cars. All manufacturers could benefit by using insurance to strengthen a relationship with a customer, making it more likely that the person would use the dealer network for repairs and service.

It's even possible to imagine car makers expanding on the insurance model and helping drivers avoid accidents. While manufacturers already increasingly include safety features such as automated braking, they could use detailed knowledge of danger spots to warn drivers that they're approaching potential trouble. Insurers and other third parties could take this sort of prevention approach, too, but it's always easier to work with a system that's built into a car rather than having to retrofit it.

Traditional insurers still have plenty of advantages -- in particular, all the expertise on pricing and claims processing that they've developed over the decades. So, I'm not saying anybody needs to fold its tent and go home. But I do think auto makes pose a credible threat to traditional insurers and warrant careful monitoring.



Paul Carroll

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Paul Carroll

Paul Carroll is the editor-in-chief of Insurance Thought Leadership.

He is also co-author of A Brief History of a Perfect Future: Inventing the Future We Can Proudly Leave Our Kids by 2050 and Billion Dollar Lessons: What You Can Learn From the Most Inexcusable Business Failures of the Last 25 Years and the author of a best-seller on IBM, published in 1993.

Carroll spent 17 years at the Wall Street Journal as an editor and reporter; he was nominated twice for the Pulitzer Prize. He later was a finalist for a National Magazine Award.


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