Pedal to the Metal

Emerging trends in the auto manufacturer and auto insurer industries are having a profound and disruptive effect on both. For both automakers and original equipment manufacturers (OEMs), new technology trends – such as back-up cameras and self-parking options – autonomous vehicles, car-sharing and vehicle connectivity are changing the way people drive. In doing so, this is collectively transforming the entire property and casualty insurance industry.

Once permitted by regulators, technology disruptions such as these could lead to new products that create significant value for insurers and their customers.

The auto insurance industry side is evolving even faster. Financial and insurer-based technologies are reducing the barriers to entry and creating new, non-traditional insurers with disruptive business models.

Steve Millstein, Senior Vice President, Sales and Business Development,
Intelligent Mechatronic Systems Inc.

These new approaches include digital insurers who are competing with the traditional brick-and-mortar establishments by selling direct to clients, without brokers or agents, and allowing individuals to buy insurance, for example, by day or by kilometre driven.

Consider, for example, how Uber’s use of technology through apps lowered the barriers to entry and disrupted the taxi and ride-sharing industries. Through technology, the company was able to provide a taxi service, but at a lower cost.

The approach allowed for major process and cost optimizations through digital smartphone-based technology and system integration. Uber used technology to pull through the demand, and enabled a service that was then demanded by consumers.

Although regulatory requirements were initially ignored, there have since been changes to rules at some provincial and municipal levels to help ensure appropriate insurance is in place, while also heeding customer demand.

Still, today, this type of business model is trending in p&c insurance with new competitors arriving on the scene and offering insurance based on entirely new business models using technology and analytics. The information gleaned from new data sources can provide insurers insight beyond just driving behaviour, helping them to better understand who their customers are and offering the possibility of expanding to lifestyle insurance services based on the digital information collected.

These expanded offerings, for example, might include home, health and even pet insurance.

Not only are these new insurers providing insurance options for consumers, they are scoring and pricing risks differently. This revolves around basing criteria on a broader set of factors, such as including lifestyle and vehicle health – collected via vehicle enablers and data exchange – rather than solely on traditional factors such as how far a vehicle is driven, vehicle make or, even, driver behaviour.

These changes are fuelling increasing

consumer expectations in terms of what capabilities they expect from cars, including how they want to experience and pay for auto insurance.

Regulators, a group generally recognized as lagging when it comes to technology, have been forced to rethink how to regulate and adapt to consumer demand. In Canada regulators have been receptive to technologies that create value for the consumer, such as usage-based insurance and similar programs that are voluntary for the customer.

Furthermore, as cars become more connected by the automakers, there is an opportunity for insurers to extract valuable data and information from vehicles. Once a driver opts into a connected program, all the information extracted can be used by the insurer.

The information most sought after today includes driving patterns and driving behaviour.

However, access to the data and the desire of the automaker to control the flow may create a new battleground between OEMs and insurers. OEM motivation to control the data is not only driven by

legitimate needs to protect access to the vehicle for safety reasons, but a desire to monetize the data itself wherever possible.

This likely is because automakers want a mechanism to replace the OEM subscription model – which includes embedded telematics paid for on a monthly basis by vehicle owners – to

monetize revenue from these new sources. Monetizing driving and vehicle data gives OEMs a revenue stream that the subscription model never did.

What does this mean? This signifies a likely collision between these two industries. The convergence of these trends will disrupt the way insurers both think of and provide insurance.

But is it necessary that one of these behemoth industries must win while the other loses?

Not necessarily.

It is possible for these industries to be brought together on an equal footing, with value creation and benefits for both. Insurers need to seek and become equipped with the technology and enabled with new business models. Doing so, perhaps through partnerships, will allow them to take advantage of the trends and create a set of “standards” for how the industry will do business in the future.

By seizing that opportunity now, insurers may be able to get ahead of connected car trends and be in a better position to identify how the two industries can work together and mutually benefit.

The goal for the insurance industry must be to develop approaches, uses and technologies that can drive the industry – before OEMs reach critical mass. It is believed connectivity will help reach this critical mass in the next 10 to 15 years.

Beginning now, the insurance industry can start creating a de facto standard and business practice that can serve as a model for this market as it grows.

Well-informed and market-facing

insurers realize that, if they wait too long, they will be forced to react to trends they had no hand in developing and that are unlikely to be to their advantage.

For an insurer, being proactive means doing the following:

• collect data from all vehicles through acceleration of vehicle connectivity using an assortment of after-market and in-vehicle technology data collection options;
• leverage available technology and business models that allow for beginning to collect data on a cost basis, identical to the future OEM model;
• determine the value of the data today, its format and its frequency before being told by others how the data will be distributed; and
• form strategic alliances and partner with OEMs to collect data from cars that are connected, perhaps providing OEMs a revenue stream today that creates goodwill in the early stages of this transition.

Recognizing the value of assistance and technology partnership may further enable both insurers and OEMs to thrive in new ways with mutually beneficial solutions in the transformative digital age.

Steve Millstein, Senior Vice President, Sales and Business Development, Intelligent Mechatronic Systems Inc.