Tag Archives: auto insurance

Will Google Slash Allstate’s Revenue?

One of the most costly open secrets of the American economy is how much people pay for brokers who sell them an over-priced product that the government requires them to buy if they want to own a car or a house.

The product in question is so-called personal lines property/casualty insurance, and there’s a good chance you are among those who are paying insurance agents a whopping $50 billion in commissions to sell you.

Now Google and WalMart are among the companies that are trying to take a bite out of that enormous inefficiency.

Before getting into the details, let me disclose my interest in this concept. Back in 1995, when my consulting firm was getting off the ground, I had an opportunity to pitch a new business idea to a trio of partners at Boston’s Bain Capital.

After having spent the previous four years working for a Boston-based property-casualty insurance company, I knew that the business of selling auto and home insurance was inefficient. Of the many opportunities here to cut costs, two were most glaring.

First, most auto and home insurance was sold by insurance companies through agents. For every dollar in insurance premiums that a person paid, about 20 cents went to agents’ commissions. According to the Insurance Information Institute, that figure had dropped to about 10.4 cents by 2013.

Second, while government mandated that people purchase insurance if they wanted to buy a car or home, rates for that insurance – and regulation of the industry more generally – were set through a process managed by regulators in each state, rather than a single federal regulator.

My pitch to Bain Capital was a simple solution, I thought – sell car and home insurance over the Internet. This would eliminate the need for consumers to pay the agent commission, and most of the savings could be passed on to consumers in the form of lower premiums.

Bain Capital was intrigued by the part of my presentation that highlighted the industry’s float – a concept well-promoted by Warren Buffett regarding the huge amount of capital that property/casualty insurers get from customers who pay for insurance well before any claims are paid.

But Bain Capital did not want to take the start-up risk that would be involved. In retrospect, I can see the wisdom in their decision. First, Bain Capital was primarily a financier of buyouts of large companies, and, second, building my idea into a real business would likely have taken a long time.

Just how long is clear from the Jan. 19 New York Times report on efforts by Google and WalMart to implement a version of the idea I pitched 20 years ago.

The property/casualty insurance industry is a huge pot of business opportunity. In 2013, premiums for auto, home and commercial insurance totaled $481 billion, of which $50 billion went for agent commissions.

In my mind, that $50 billion could be reduced to around zero. After all, if I buy a car, I know that I need to buy insurance. Why should 10% of my insurance premium go to pay someone who sells me that policy? Why not subtract that 10% from my insurance premium and let me buy the policy online after comparing vendors based on price and service quality?

It appears as though Google is trying to come to the rescue for consumers. Google operates a search engine for auto insurance prices called Google Compare. According to the Times, Google Compare “has been operating in Britain for two years, and Google is working on something similar for the U.S.”

Google can sell insurance in about half of the U.S. and has formed a partnership with an insurance comparison site. According to Forrester Research analyst Ellen Carney, Google is licensed to sell insurance “in about half of the states.”

Moreover, Google partnered with Compare, an American auto insurance comparison site owned by Britain’s Admiral Group, a car insurance company that has operated a European price-comparison site for more than 10 years. Through the joint venture, Google will access insurers in Compare network, the Times reports.

For the last 20 years, Allstate, which is the largest publicly traded property/casualty insurer and ranked third in the industry by sales in 2013, according to the National Association of Insurance Commissioners, has been doing pretty well. Since June 1993, its shares have risen 389%, and as of Jan. 19 they stood at a record $70.59.

People buy Allstate insurance through agents, which means that, if they could buy lower-priced insurance free of agent intervention while still getting good quality of service, the value proposition could cut into Allstate’s revenues.

But it remains to be seen whether Google will succeed. As I see it, Google Compare can generate significant revenues if it does the following:

  • Offers the same coverage at lower rates than rivals such as Allstate and others that sell through agents;
  • Delivers consistently excellent claims service; and
  • Generates enough public awareness of the superiority of its value proposition to induce consumers to overcome their emotional bonds with their agents to switch to Google’s insurance.

Google would be facing off against the likes of Geico in trying to convince people they can save money by buying directly from a company rather than through agents. Back when I was pitching Bain Capital, direct selling accounted for about 14% of industry revenue – but by 2012 that had risen to 28%, according to A.M. Best.

As a consumer I would love to see Google succeed in this quest. But given my experience trying to get financing to implement it, I would not be surprised if the golden chalice of low-priced auto and homeowners’ insurance sold online remains elusive for decades.

A New Ride-Sharing Service Raises Even More Questions

The U.S. has seen an explosion in what is often referred to as the emerging “sharing economy” or “collaborative consumption.” In an increasingly connected society where most people have access to mobile communication devices, peer-to-peer services are springing up, based on mobile apps that consumers can use to access transportation services that historically have either not existed or were controlled by often highly regulated business or government entities.

One might argue that this is not a new concept, given that hitchhiking has been around since not long after the wheel was invented and was quite common in the 1950s and 1960s until it fell out of vogue as its inherent dangers gained more attention from the media and increasing numbers of consumers owned or had access to automobiles or mass transit.

But what we’re witnessing today is a relatively new phenomenon. Uber, Zimride, Lyft, ZipCar, Turo, GetAround, TaskRabbit, JollyWheels, RentMyCar, Zilok, CityCarShare, bla, bla, bla, bla, bla….

Which brings us to BlaBlaCar, the latest incarnation of car sharing. Founded in France in 2006, BlaBlaCar now claims to operate in about a dozen European countries and is exploring expanding into other countries, such as India and Brazil. BlaBlaCar bills itself as a “ride sharing” mechanism, as opposed to “car sharing.” That falls somewhere between fee-based hitchhiking and a somewhat irregular share-the-expense car pooling arrangement. Details on how the system operates can be found at the company’s web site.

BlaBlaCar currently does not operate in the U.S. There is some question as to whether it can be as successful in the U.S. as it claims to be in Europe. Owning and operating a vehicle in Europe is far more costly than it is in the U.S. There is also a perception that Europeans may be more trusting of, or accustomed to, riding with strangers than Americans are. In addition, there are social issues to consider in the U.S. For example, a BlaBlaCar driver can refuse to transport particular passengers. If such a driver is white and a declined passenger applicant is black, would there be civil rights issues that could be addressed by claims or suits for discrimination?

The question addressed by this article is, if BlaBlaCar were to begin operations in the U.S., would the personal auto insurance policies of its drivers cover this type of activity? According to the terms and conditions on BlaBlaCar’s web site and media articles about their service, most auto insurance in Europe covers this exposure because there is no “profit” involved. The passenger fee is referred to as a way to share the cost of a trip. The terms and conditions include a stringent hold-harmless provision and a liability cap to protect BlaBlaCar.

However, the company’s position on how personal auto insurance responds in Europe would be immaterial if it were to commence operations in the U.S. Many, if not most, personal auto policies in the U.S. may exclude BlaBlaCar activities regardless of whether a “profit” is sought or made. The decision could depend on the facts of each situation and the exclusion wording in the policy. The first question is whether there can be assurance that a driver is not making a profit. Second, the policy language may not consider profit to be an issue. For example, these are the two most common exclusions found in U.S. personal auto policies:

  • We do not provide liability coverage for any “insured”…for that “insured’s” liability arising out of the ownership or operation of a vehicle while it is being used as a public or livery conveyance. This Exclusion (A.5.) does not apply to a share-the-expense car pool.
  • We do not provide liability coverage for any person…for that person’s liability arising out of the ownership or operation of a vehicle while it is being used to carry persons or property for a fee. This exclusion (A.5.) does not apply to a share-the-expense car pool.

This language is taken from two different edition dates of the “ISO-standard” personal auto policy. In the case of use as a “public or livery conveyance,” ISO’s filing memorandum stated that the intent of this exclusion is to preclude coverage for vehicles available for “hire” to the general public for the transportation of people or cargo (e.g., taxis, sightseeing vans and package delivery services). The exclusion is not contingent on the profitability of the person or enterprise holding their vehicle out to the general public for hire.

In the case of a vehicle used to “carry persons or property for a fee,” there is no mention whatsoever of whether this fee generates a profit for the owner/driver. In one case, this exclusion was held to apply to someone who used his pickup truck to transport a friend’s son’s belongings to college in exchange for gas money.

However, both exclusions admittedly exempt a “share-the-expense car pool.” So what is meant by a “car pool”? One dictionary definition describes it as: “an arrangement between people to make a regular journey in a single vehicle, typically with each person taking turns to drive the others.”

Note the reference to “regular” and alternating as drivers. On the other hand, Wikipedia’s discussion of the term “carpool” implies a potentially broader concept that could include how BlaBlaCar operates. This muddies the water to the point that no blanket statement can be made about how U.S. personal auto policies might respond to claims arising from BlaBlaCar and similar ride-sharing services. If this were to become a significant exposure, one might expect U.S. insurers to define “car pool” in a way that precludes coverage for these services.

In the past year or two, we have seen various forms of “car sharing” exclusionary endorsements introduced by ISO and individual insurers, though many of them still do not fully address the “share-the-expense car pool” situation. The only conclusion we can reach at this point is that how a vehicle is being used and how that use fits with an insurance policy’s insuring agreements and exclusions are becoming much more important and more difficult to determine.

The insurance industry is not known for its innovation nor its ability to respond quickly to emerging social changes. The usual reaction is to exclude an unanticipated exposure until the industry can reasonably measure and predict the risk of loss. The growth of car- and ride-sharing (not to mention home-sharing) is something that will need to be closely monitored by the industry.