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5 Trends Changing Auto Insurance

Nearly every time you turn on a light switch today, you are witnessing the power of trends upon shifting markets. Though lighting isn’t going away, the types of bulbs we use and their supply chain has been in flux for the past two decades.

On May 27, 2020, General Electric stopped making light bulbs entirely (after 130 years), selling its lighting division to smart home company Savant Systems. All of the other major lighting players have also been negotiating a market and industry in the midst of change. Government mandates for lower energy bulbs have removed most incandescent bulb manufacturing operations from the market. LED bulbs not only use much less energy, but the bulbs last far longer — so the sales of bulbs will drop over time.

Philips Lighting, another stalwart industry player (125 years old), decided that instead of leaving the business it would develop Philips Hue, a connected lighting solution. Smart homes have now given rise to smart lighting, including smart bulbs — digitally driven bulbs that can adapt themselves to the experience that a customer wants. Many can be controlled via home networks and mobile phone apps. Philips also chose to spin off a whole new brand, Signify, that would embrace sustainability and energy-efficient lighting.

Auto insurers are going to have choices like this to make. Auto insurance, coincidentally, is also a 120-year-old “established” industry, based around a policy transaction. Will insurers continue to provide traditional insurance in traditional ways until they are forced down a dead-end path, or will they embrace new trends, new technologies, new services and perhaps a new mobility ecosystem approach? Will they reinvent themselves to become next-gen mobility customer experience providers?

In Majesco’s most recent thought leadership report, “Rethinking Auto Insurance: From a Transactional Relationship to a Mobility Customer Experience,” we use customer primary research and recent trend data from other sources to answer two pertinent questions:

  • What are the trends pushing auto insurers to adapt their business models?
  • Why should auto insurers begin creating mobility ecosystems and customer experiences that will transform their purpose and their profits?

We consider five trending points that are driving change, including:

  • The Auto Insurance Buyer – A Shifting Demographic
  • Vehicle Technologies
  • New Data Sources
  • Ownership vs. On-Demand Mobility
  • New Auto Insurance Sources and Providers

Let’s briefly consider these trends and how they may affect auto insurers.

Trend 1: The Auto Insurance Buyer

For purposes of simplifying analysis within the Mobility Survey, we created two generational “super segments” by combining two different age groups, Gen Z and millennials and Gen X and Boomers. As expected, the Gen X and Boomer segment is more active than their younger peers in buying or influencing purchases of household services, insurance and financial products. Three exceptions were in individual life insurance and voluntary benefits, where the segments purchased at equal rates, and Amazon account usage, where Gen Z and millennials have a slight lead.

The older super segment has sizable leads in personal lines P&C insurance (auto and home/renters), employee benefit health insurance, investments and annuities. All of these products are good fits for the 30- to 60-year-old “sweet spot” for insurance and financial products, given they are at a life stage with the greatest insurance and financial planning needs as they establish households and families and accumulate wealth and possessions that need protection.

See also: The End of Auto Insurance  

In 2021 – one year away – millennials, all by themselves, will meet and begin to surpass the older super segment. The young super segment’s dominance will accelerate four years later when the first members of the Gen Z generation also turn 30, vaulting this new generation to buying dominance. Providers of household services, insurance and financial products that have not adjusted their business models, products and customer engagement experiences to meet the needs of this new “sweet spot” buyer market will find themselves challenged and left behind.

The insurance industry will need to adapt to this new super segment of new customers.

Figure 1: Insurance buyer “Sweet Spot” populations by generation in 2000 vs. 2020

Trend 2: Advanced Technologies for Vehicle Safety

Nearly 60% of Gen Z and millennials and half of Gen X and Boomers who own or lease a car have at least one type of newer safety or convenience technology in their vehicle. Navigation systems and blind spot detection are the most popular among both segments. The Gen Z and millennial vehicles have higher rates of collision avoidance systems, surround view systems, automatic braking and automatic parking.

These technologies were expected to depress auto insurance premiums thanks to fewer accidents.  However, insurers’ experience to date has not matched this expectation. The cost of repairing or replacing these more sophisticated vehicles with advanced technologies is greater than the savings derived from lower frequency. Some of these technologies have indeed shown benefits, but the translation to lower premiums has been minimal. For example, NAMIC found that electronic stability control saves a customer an average of only $8 on the annual premium. And, “those who pay for blind spot warning, driver alertness monitoring, lane departure warning, night vision or parking assistance systems save nothing at all.”

Is it possible that eventually the impact of these technologies will overtake the cost of maintenance and repair? In theory, yes. The greater number of high-tech vehicles that are on the road, including the autonomous vehicles of the future, the greater the chance that vehicular accidents will drop. There are, of course, an unknown set of circumstances related to COVID-19 and auto use. Will a significant percentage of the workforce stop commuting? Will public transit commuters begin to use their vehicles to avoid exposure? Or, will technologies such as driverless vehicles create an entirely new commuting scenario?  Lilium, a German aviation startup “unicorn,” has plans for bringing flying taxis to the skies by 2025, which will further change the mobility options. The answers may lie in the rise of mobility ecosystems, which we’ll examine later.

Trend 3: New Data Sources

Connected devices (and other data sources) are enabling underwriting and pricing based on mileage, location and driving behavior, which could lower premiums, while also making them potentially less predictable. Surprisingly, there are very similar levels of interest in these new data sources between the two generational super segments.

The COVID-19 shelter-in-place actions slashed the number of miles driven – by an estimated 50% between mid-March and mid-April. This is spurring speculation and debate about the pandemic’s longer-term effect on mileage-based or usage-based insurance. Although streets and roads have fewer vehicles on them, numerous states and cities have reported increases in speeding and reckless driving and fewer but more severe accidents. From an insurer perspective, broader usage-based/UBI models would be the preferred approach post-COVID-19, rather than simply tracking miles driven.

Despite the growing acceptance of new data sources, with the potential for variable premium by the month, the traditional six-month term with a set premium is preferred by both generational groups. However, Gen Z and millennials have a higher interest in a usage-based model that is automatically triggered by sensing when the car is parked or being driven.

Within the Gen Z and millennial segment, 28% of respondents indicated they have used a device or app to record their mileage or driving behavior as compared with only 15% of the older super segment. Both generational super segments showed strong interest in a smartphone app that provides real-time alerts and advice about driving behavior and conditions. Interest is even higher if following the advice leads to discounts on the next insurance bill.

Trend 4: Ownership vs. On-Demand Mobility

There is growing popularity and use of non-owned vehicles and alternative mobility options like rideshare, rentals (traditional and shared economy) and other local or urban rental options like scooters and bicycles. With their increased usage comes the threat of an offsetting level of private vehicle ownership and leasing, leading to a declining need for personal auto insurance.  This declining ownership could accelerate if more people work from home, eliminating the need for the traditional “two-car family” and using alternative, on-demand mobility.

All-inclusive vehicle subscription services are a relatively new mobility option offered by several auto manufacturers (currently, most are luxury brands) and third-party services. Most allow the customer to switch vehicles on a periodic basis and pay a set monthly fee that covers the vehicle, maintenance and insurance. A surprisingly high number (30%) of Gen Z and millennials indicate they are using or have used a service like this – nearly four times higher than the older generation, indicating interest in different access to mobility options as compared with “owning” a vehicle. Some of these users likely correlated these experiences with micro-term car-sharing company’s such as Zipcar.

See also: Insurance Innovation — Alive and Kicking  

Nearly 26% of Gen Z and millennials and 20% of Gen X and Boomers indicate they would or definitely would consider a vehicle subscription the next time they go to purchase a vehicle. When you add in the “maybes,” these numbers jump to 71% and 61%, respectively.

Figure 2: Usage of mobility technologies and participation in mobility trends

Gen Z and millennials use car-sharing services more frequently than Gen X and Boomers. Over a third (35%) traveled this way for five or more days in the previous month, compared with only 18% of Gen X and Boomers. Clearly, this is an established mobility preference within the younger generation that will fuel a growing market for on-demand rideshare coverage and indicates, once again, the potential decrease in car ownership by this younger generation. 

Trend 5: New Auto Insurance Sources and Providers

Most of the consumers we surveyed said they still own or lease one or more vehicles. The traditional purchase methods for auto insurance are still the most preferred channels — agents/brokers or direct via an insurer’s website. This is consistent from the last couple of years from our consumer research.

However, Gen Z and millennials also indicate strong interest in insurance embedded in the purchase cost of a vehicle, or buying insurance from a vehicle manufacturer’s website, an affinity group, car dealership, or car shopping website – about 25% higher than the older generation. Interestingly, this group also showed strong interest in purchasing insurance from three of the “tech giants,” Amazon, Google and Facebook – a wake-up call for both insurers and those selling vehicles. For a better glimpse, see Fig. 3 below.

Figure 3: Interest in traditional and new sources of auto insurance

If we look at all five of these trends in aggregate, auto insurers are facing a light bulb moment. Many of these trends will likely accelerate as we reconsider our work lifestyles moving to the home coming out of COVID-19.  If changes are going to occur in demand levels, channel types and service offerings, can auto insurers compensate by bringing the right kind of change to the market? Can they invent their own supply chains of opportunity?

In our next mobility blog, we look at this supply chain in depth. Auto insurers are redefining themselves as mobility companies and in the future will be seeking to own the mobility experience using a vast mobility ecosystem, ideally building those ecosystems around their brands. Those who will lead the mobility shift are the ones who have prepared their business systems and models that will focus on the customer mobility experience and foster non-traditional products and services.

Now is the time to start this conversation within your organization! Use Majesco’s “Rethinking Auto Insurance” report as a kickstart for your internal brainstorming or view the replay of our webinar on the research. 

The End of Auto Insurance

Imagine that you wake up one day in the future and you read this headline:

“Auto insurance is no longer being sold.”

The article says accidents are rare or no longer possible due to autonomous technologies, hundreds of new safety features, an entirely new methodology for handling vehicular risk and a dramatic reduction in the personal ownership of vehicles. When claims events do happen, they are covered by the manufacturer or simply paid for out of a reserve created by a globally pervasive mobility corporation.

If this seems far-fetched, you will want to read Majesco’s latest report, “Rethinking Auto Insurance: From a Transactional Relationship to a Mobility Customer Experience.” Though auto insurance is unlikely to go away any time soon, premiums are beginning to decline and will likely continue to decline in the coming two decades at a rate much faster than many would like to admit is possible. This decline will force auto insurers to reinvent themselves in ways that are both challenging and exciting. It will be the end of auto insurance as we currently know it, but it will be the beginning of mobility experience and ecosystems that could improve insurers’ profits with new revenue sources.

Four years ago, we published our first Future Trends report (with an update to the report in December 2019) that examined a major shift unfolding due to the converging “tectonic plates” of people, technology and market boundary changes disrupting and redefining the world, industries and businesses — including insurance. In particular, these trends are changing traditional auto insurance. Majesco’s new report goes one step further to answer two highly pertinent questions:

  1. What trends are pushing auto insurers to adapt their business models?
  2. Why should auto insurers begin creating mobility experiences and ecosystems that will transform their purpose and their profits?

In today’s blog, we examine the high-level trends that are affecting auto insurers and take a peek into how insurers are likely to adapt and respond. We’ll cover:

  • Customer, Technology and Market Boundary Changes
  • The Generational Shift in How Transportation Is Perceived and Used
  • The Auto Insurance Transaction vs. a Mobility Customer Experience

Customer, Technology and Market Boundary Changes

In February, Uber said that 10% of U.S. millennials who ride with Uber have changed their car ownership behavior. Due to increased costs of vehicle ownership, environmental consciousness, technological innovation and the availability of mobility through Uber, millennials are choosing to get rid of a personal vehicle or choosing not to buy a car.

Because of the customer, technology and market boundary changes, traditional auto insurance is under growing pressure and threat from many fronts, including:

  • The growing use of non-owned vehicles and mobility options like rideshare, rentals (traditional and shared economy) and other local rental options like scooters and bicycles, reducing the market size for individual auto insurance purchases.
  • Non-insurance providers that offer/embed insurance for vehicles and other mobility options, potentially cutting off traditional carriers from these opportunities.
  • Increased effectiveness of safety technology, putting more emphasis on prevention and less on traditional indemnification, potentially depressing auto insurance premiums. It is estimated that advanced driving assistance systems (ADAS) features and enabling technologies increasingly included in new vehicles can reduce losses 20% to 30%.
  • Connected devices that enable improved data, beyond telematics, such as mileage, location, weather-related and driving behavior. This is allowing for real-time, data-based underwriting and pricing, which could lower premium volume or make it less predictable.
  • Auto manufacturers that are leveraging their customer relationships and data to offer insurance, repairs and services (Porsche, Volvo, Tesla, Ford, GM, etc.). They are recasting themselves as “mobility companies.”
  • The rise of on-demand insurance, expected to increase 30% by 2026.
  • The rise in testing and use of self-driving vehicles and robots due to the COVID-19 pandemic for contactless deliveries, which could accelerate a shift to a future of autonomous/semi-autonomous mobility marked by fewer accidents.

See also: Evolving Trends in a Post-Covid-19 World  

The Generational Shift in How Transportation Is Perceived and Used

Adding to the pressure on auto insurers is the shift in generational views on transportation, mobility and product expectations for auto insurance. Within the report, we discuss the shift between millennials and Gen Z versus Gen X and Boomers, including:

  • 28% of the younger generation currently use a device or app to record mileage and driving behavior — compared with 15% for the older generation – nearly a 100% difference.
  • 11% rented someone else’s car through a sharing service, and 9% rented out their car, versus 2% and 1% for the older generation.
  • 30% of the younger generation are using or would use an all-inclusive vehicle subscription service – nearly four times higher than the older generation, indicating interest in different mobility options as opposed to owning a vehicle.
  • 40% of the younger generational segment would pay $10 per month for a mobility solution with access to a wide array of services. Only 20% of the older generation is interested in this — a 100% difference.
  • The younger generation is two times more likely to:
    • buy auto insurance from a car shopping website or a vehicle manufacturer website,
    • have insurance included in the purchase or lease of a vehicle,
    • buy insurance from Amazon or Google.

Auto insurers must reimagine the scope of what they will offer to customers – an experience with a risk product, value-added services that are part of a broader mobility ecosystem and a compelling customer experience. This is where exciting new business opportunities await. And where new competitors are emerging, including automotive companies, ride share companies and others.

The industry status quo for auto insurance is rapidly eroding. Insurance is being re-defined with a growing number of influences, upending decades of business assumptions. In this new decade, a fresh auto insurance opportunity exists for those who will participate in a broader mobility ecosystem and the growing number of insurable situations.

The Auto Insurance Transaction vs. a Mobility Customer Experience

As a result of all of these changes, the greater threat may be auto insurers’ continued 100-plus-year-old view of auto insurance as a policy transaction.

With so much change around transportation options and automotive, companies outside insurance are coalescing around a shift to “mobility.” From the decline in car ownership for the first time since 1960, with 9.1% of households in 2015 having no cars, to the rise of ride-hailing and car-sharing services, a plethora of transportation options continue to expand.

According to a survey from Cox Automotive, nearly 40% agree that having transportation is necessary, but owning a vehicle is not. Most interestingly, among millennials, the rate jumps to 45%, and for Gen Z it jumps to 55%, as reflected in Figure 1. This implies that mobility options are important but can be fulfilled by many means beyond traditional vehicle ownership … a significant shift affecting business models from automotive companies to insurance companies alike.

Figure 1: Importance of vehicle ownership as a mode of transportation

These shifting customer, market boundary and technology trends are creating a new market segment called “mobility” that brings together different elements of other markets or industries, including insurance. Unfortunately, for customers the current experience is fragmented, inconsistent and difficult at best, as they interact with disparate entities to complete necessary tasks across the mobility journey. These would include everything from financing a vehicle, to using and maintaining that vehicle, to selling that vehicle. You could also include transactions such as renting a car, parking a car, purchasing tickets for public transit, using public scooters and bicycles and, of course, maintaining insurance for any of those tasks.

Customers currently have to work with the different parties individually, requiring time and inducing frustration, meaning that customers may reduce, reallocate or eliminate a substantial portion of today’s auto insurance premiums. Insurers must rethink their scope away from an auto insurance transaction to a broader mobility experience that redefines and includes:

  • Insurance Product: Product (risk, services, experience) redefined but requiring insurance to participate and play within ecosystems, rather than simply existing as an ecosystem unto itself.
  • Mobility Policy: One unified policy to cover whatever mode of transportation a customer chooses, instead of separate policies for each.
  • Value Added Services: Risk protection services as a component of an ecosystem that provides a single place for all of the “jobs” a customer needs to get done across the mobility customer journey – providing a powerful, single engagement and eliminating points of friction between the different participants of the ecosystem.
  • Continuous Underwriting: Constantly updating the risk profile of an individual or thing that changes the terms and pricing, influenced by the continuous flow of data from autos, telematics and IoT devices.

Highly networked, data-driven, value-added mobility business models are rapidly emerging, primarily outside of insurance. Automotive companies like Tesla, Ford and GM are leading this shift along with platform companies like Uber. They are redefining the customer journey, and the entire customer relationship, across a broader set of transportation options.

See also: COVID-19’s Once-in-a-Lifetime Opportunity  

These shifts will push auto insurers into new realms of business, expanding their definitions of product and service and making them much more relevant to the daily life and experience of each customer.

In our next blog, we’ll look at real evidence from a recent Majesco survey that confirms the trends we have highlighted above. We’ll look at the specifics of two major demographic groups and what they are looking for in their mobility experiences. We will also look at what they are currently doing regarding mobility and technology versus what changes they are considering for the future.

You can access this information even faster by downloading our latest report, “Rethinking Auto Insurance: From a Transactional Relationship to a Mobility Customer Experience,” or view the replay of our webinar on the research.