Author: Pallav Singh

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Unlocking Customer-centricity with Digital Insurance

Customer-centricity means prioritizing the consumer in all business decisions. This has been the case for all consumer-facing industries for quite some time now. While every company would like to believe and say so, putting this into practice is fairly difficult and the auto insurance industry isn’t immune to this. However, in the commoditized world of insurers, customer centricity is no longer just a good to have, but is the best differentiator and the best strategy for growth. 

COVID-19 hasn’t been kind to any sector, and insurance too has had to deal with the fallouts. With job losses and the economy slowing down significantly, consumers will get conscious and more demanding. The best way for Insurers to differentiate and compete by creating customer-centric services and offerings. 

A McKinsey report suggests that there is a two-level impact of COVID-19 on the U.S auto insurance industry. From the outset, as there are lesser people on the road, the number of fatal cases and hence the claims are going down. While this shows what is happening on the cost side, it does not take into account the pressure on the revenue side. The same market-effect also shows a decline in car sales and hence in the auto insurance taken on these cars, which now stand unsold. If the auto insurance industry wants to cope with these market forces, it will have to find ground-up ways to realign its interests with that of the individual customers. 

Conventional practices and competition in the industry have made the auto insurers push out products at suboptimal rates which seem common for the market but are not equally personalized for the end-user. A comprehensive change in the industry that begins with leveraging digital platforms, can serve as the necessary solution to solve this problem.

The Era of Digital Insurance: Catering to Individual Demands

Customer-centricity is all about creating value for the customer and catering to their individual needs. The digital revolution has given birth to a new connected world where adding value to a customer’s experience is both essential and challenging at the same time. The kind of value creation done by digital giants like Amazon, Google, and Apple is really hard to match for a tightly regulated industry like insurance. Consumers now have a wider range of options with highly personalized offerings available in every industry. Their sensitivity to personalized offerings clearly shows that they expect the same out of the insurance industry as well. The trend is going narrower from formulating strategies for a target audience to distinguishing the needs of individual customers. Customers now expect friendly, personalized, relevant, and enjoyable experiences across multiple channels. They want their specific needs to be understood and catered to.

According to a report published by Accenture titled “The Digital Insurer: The Customer-centric Insurer in the Digital Era”:

“The real challenge of customer-centricity is to move away from the product-driven push and to develop the corporate ability to truly understand the customer’s stated and tacit needs, to generate new ones, and to provide highly personalized solutions and remarkable experiences that are relevant to each individual’s preferences, circumstances and point in time.”

Distinguishing the Individuality and Creating Customized Products

It is evident how digital disruption of distribution channels has forced many industries to adapt to new norms of customer-centricity. For the auto insurance industry, the disruption will begin on three fronts:

1. Having simpler products: A product that is simple to understand and connects directly to an individual customer has a better conversion rate.

2. Having seamless processes: Using Big Data Analytics and AI tools can reduce the time and efficiency of processing. With no manual intervention, the customers are assured of the quality experience which they now take for granted.

3. Transparency in Communication: This can be the most critical factor for an industry like Auto Insurance. The level of transparency that the digital revolution has brought is unforeseen and the customers are getting used to it. They want the same from other industries too.

For an industry like auto insurance which is highly affected  in the crisis caused by COVID-19, learning from the digital giants and changing their approach towards customer-centricity is the only way forward.

According to the report published by Boston Consulting Group( BCG):

“Insurers must radically improve customer service if they are to combat the reduced profitability of products, the digital disruption of distribution, the competition from new, non-traditional entrants, and the rise of savvier, more value-driven consumers. Doing so requires taking a more customer-centric view of operations in three key areas.”

The following excerpt from the Report clearly depicts how waiting time takes almost 95% of the processing time for an insurance application.

Courtesy: BCG

The Road Ahead for Auto Insurance Sector: Understanding Individual Customers

As per a  2020 DXC Insurance Survey wherein more than 2000 US consumers from the insurance community participated  was conducted to  gauge their views about insurance and their interaction with those providing coverage :

1. 66% of consumers are open to using technologies in exchange for better services or lower insurance premiums.

2. 42% of surveyed consumers believe that they are underinsured.

3. 87% of consumers stated that they were comfortable in sharing their personal information, as far as it helped them in availing more affordable insurance. 

These data-points show that the three perceived hurdles of harnessing digital practices – lack of adoption, lack of a market need, and privacy issues, are no longer systemic issues. The auto insurance industry can now begin its reconstruction to offer personalized insurance products.

 

Some of the ways through the auto insurance sector can transform itself in the Post-COVID world is by adapting the following strategies:

1. Assess the Current Pricing-Models: The pricing models have to be changed as per the changing time. The unemployment rates are increasing and given the economic turmoil, might be on a downward trajectory for a while. The legacy pricing models were not engineered with a sensitivity for such market conditions. At the same time, pandemic or system-induced temporary unemployment does not make an individual uninsurable. It simply calls for adjusting the legacy pricing models to be re-engineered in a way that takes into account this situation and allows even the unemployed individuals to avail insurance. 

2. Realign the Marketing Strategy: The entire marketing strategy has to be shifted from conventional ideas, tools, and channels, to a more data-driven approach. Data analytics technologies that sources deeper forms of data to unravel behavioral patterns with AI, ML, and NLP, will lend an edge to the companies that seek deeper and more actionable insights about their customers.

3. Support the Existing Customers: The pandemic has affected everyone in its own way. If the auto insurance industry can learn the grievances of the customers and help them in sustaining through tough times, this will help in creating a strong base of loyal customers.

Conclusion

COVID-19 has surely affected the auto insurance industry in an unforeseen manner but there is always a silver lining if one can find it. This might prove the best time for the industry to reshape its strategy towards distinguishing and catering to the individual needs of the customer instead of pushing run-of-the-mill products. The product, it’s delivery and the marketing efforts have to be redefined for the industry to regain its foothold. 

 

 

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Cost of Road Accidents: Why should everyone care?

Road traffic crashes numbers are staggering and is the eighth leading cause of death globally, claiming more than 1.35 million lives each year and causing up to 50 million injuries. That’s nearly 3,700 people dying on the world’s roads every day.

Injuries in many cases cause disability with life-altering and long-lasting effects. These losses take a huge toll on families and communities. The cost of emergency response, insurance, auto repair, health care, and human grief is immense.

Deaths and injuries resulting from road traffic accidents remain a serious global problem and current trends suggest that this will continue to be the case in the foreseeable future.

But road traffic crashes are not “accidents”. Most of them are preventable

Distracted driving, fatigued driving, over-speeding, driving under influence of drugs or alcohol, rapid urbanization, poor safety standards, lack of enforcement, and a failure to wear seat-belts or helmets contribute to the trends we see in road accidents over the past decade.

The growth of the auto industry in the past decade has seen faster vehicles, it’s a generally accepted statement across the globe, “speed thrills but kills”, a lot of safety organizations use this catchy phrase to raise awareness about the problem. But the real issue is a contradiction, the vehicle manufacturers advertise about the performance of the vehicle, often about the speed of the vehicle, how fast a vehicle can travel 0-100, top speed, terms like ‘racing DNA’ referring to the performance of the vehicle.

The problem of people’s obsession with speed coupled with distraction, tendency to break rules and fatigued driving could be life-threatening.

In a popular British web series on Netflix, Black Mirror, an episode showcases the human cost of distraction while driving. A man loses his entire family because he couldn’t control the urge to check his phone while speeding on the highway in the night, plagued by the fatigue of driving.

According to marketing industry influencer Krista Neher, the human brain can process images up to 60,000 times faster than words; Visual awareness tools like Black Mirror episode helps put a face, name, and story behind the staggering number of injuries, accidents, and fatalities.

Government and Road Crashes

In addition to the above problems, the socio-economic factor plays an important role in understanding road accidents. Developing countries, moving rapidly towards urbanization, see a major chunk of global road accidents given their infrastructural limitation, inadequate road safety law practices and lack of standard safety equipment in vehicles.

With an average rate of 27.5 deaths per 100,000 population, the risk is more than 3 times higher in low-income countries than in high-income countries where the average rate is 8.3 deaths 100,000 population.

Although only 1% of the world’s motor vehicles are in low-income countries, 13% of deaths occur in these countries. There has been no reduction in the number of road traffic fatalities in any low-income country since 2013.

Even though 123 countries representing six billion people have laws that meet best practice for at least one of the five key behavioral risk factors, the enforcement of road safety laws still remains a challenge for the government bodies across the globe, given the scale of the problem and priority of under-developed and developing countries being poverty alleviation and economic growth.

Developed nations like United States of America, United Kingdom, Germany, and the Netherlands have learned from their past mistakes and fortunately grown in their understanding of road accidents at the same pace as the technology developments in the auto industry with certain loopholes yet to be covered to bring down the numbers to acceptable.

Countries in the Americas and Europe have the lowest regional road accident fatality rates of 15.6 and 9.3 deaths per 100,000 people respectively.

Regulatory, behavioral, technological factors play a role in understanding why the problem is still prevalent in developed nations across the globe. For example, the U.S. does not have generally accepted speed limit restriction of 50 km/h on urban roads, there is insufficient evidence on the effectiveness of legislation to limit or prohibit the use of mobile devices while driving to establish best practice criteria.

The joint efforts of the government, safety organizations, and private organizations have helped reduce road accident rates in 2018 by 25% in high-income groups and 23% in middle-income groups since 2013.

Auto Insurance Sector and Road Crashes

Human life and government are not alone in facing adversities from road accidents, the auto insurance sector also pays a heavy cost for the unfortunate events on road.

The auto insurance business in 2018 reported a whopping $783.10 billion in written premiums, contributing 33% to total non-life insurance premiums of $2.373 trillion. Overall profitability of global Property & Casualty remains at 6‒6.5%, which barely covers the industry cost of capital.

In the U.S. auto insurance losses and expenses have exceeded premium for every year since 2007. The auto insurance sector reported earned premiums of $110.48 billion in the year 2015 with a risk exposure of $188.51 billion. Companies countrywide incurred losses of $88.36 billion in the year with a loss ratio of 79.98.

A partial reason for the losses is high claim rates and accidents. In the year 2015 U.S. witnessed 37,757 fatalities and over 4.4 million serious injuries which required immediate medical attention.

The cost of medically consulted injuries was estimated at $440.6 billion. Costs include wage and productivity losses, medical expenses, administrative expenses, motor-vehicle property damage, and employer costs.

The United States alone reported 277 million vehicles, 227 million licensed drivers, and 3.24 billion miles driven annually. Calculating the claim frequency and claim severity for the vast number of vehicle users accurately is a difficult task.

Dan Ariely, a Duke University professor, and the Chief Behavioural Officer at Lemonade, says, “Every dollar your insurer pays you is a dollar less for their profits. So, when something bad happens to you, their interests are directly conflicted with yours. You’re fighting over the same coin.”

Insurance Companies and Road Crashes

U.S.’s largest auto insurer’s wing, State Farm Mutual Automobile Insurance Company, in the year 2019 reported premium earned of $42.14 billion compared to $43.43 billion a year ago and claims and expenses of $42.94 billion compared to $42.15 billion in the previous year. The company’s underwriting loss for 2019 stood at $763 million compared to underwriting gain of $1.28 billion in 2018.

United Kingdom’s majority market stakeholder in the auto insurance sector, Admiral Group, for the year 2019 reported a motor loss ratio of 87.6 compared to 88.1 a year ago.

In such a cost-competitive market, auto insurers are trying to utilize technology to better predict claims and premiums of customers. Driver’s habits play an important role in the occurrence of accidents hence solutions that help increase the underwriting gains and reduce the loss ratio are encouraged in the modern insurance sector.

U.S.’s third-largest auto insurer has found alternatives to better judge the claim ratio using telematics. In 2015, the company adopted a telematics solution to better analyze driver habit and adjust premiums accordingly. The adoption also helped better understand and predict the frequency ratio and severity ratio of claims.

In the year 2015, the company’s auto segment recorded an underwriting income of $23 million, three years after telematics adoption, the company reported an underwriting income of $1.68 billion in 2018. The loss ratio of the company’s auto segment also improved from 74.5 in 2015 to 66.2 in 2018.

Insurtech though has helped companies stand out in the market, the overall condition remains feeble because of the number of accidents that occur across the roads globally. The shift towards insurtech, with efforts of the government in formulating policies to raise awareness and pass ideal laws in their respective nations, shows signs of improvement.

Major auto insurance companies across the globe are considering technology solutions and other solutions to enhance driver experience, reduce the number of accidents and spread awareness about road safety. The shift despite being slow shows great promise for the auto insurance sector as well as road safety in the coming years.

The problem of road accidents impacts individuals, governments, the insurance sector, the auto sector, companies, and the economy. The problem though unequally divided based on various factors does persist globally. The world realizes the issue and is taking steps towards change yet falls short of achieving acceptable numbers.

The impact on human life cannot be monetarily defined but the impact on the economy and government is very evident from the steps taken by countries across the globe.

With the governments, insurance companies take a big chunk of the hit, which is clearly visible in the low underwriting gains in the top companies in the auto insurance sector in developed nations, they are adopting new ways to optimize the process of studying risk, claims and premiums.

Driver habits and related metrics will play a huge role in the coming decade to help facilitate the agendas of private and public players in curbing the leading cause of death in youngsters across the globe. 

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Impact of road accidents on U.S. government and auto insurance sector

Motor vehicle crashes is one of the leading causes of death among people under the age of 55. In recent decades nearly every high-income country has made more rapid progress than the United States in reducing the frequency of road traffic deaths and the rate of accidents per mile of vehicle travel.

More than 38,000 people die every year in crashes on U.S. roadways. The U.S. traffic fatality rate is 12.4 deaths per 100,000 inhabitants, an additional 4.4 million people suffer serious injuries.

The level of traffic is amongst the leading causes of road crashes in the country as 277 million vehicles are driven 3.24 billion miles annually. On average, drivers in the United States spend 51 minutes behind the wheel every day which has resulted in 14 million road crashes in 2017.

The National Safety Council has addressed the problem over the years and has listed best practices to stay safe on the roads but the outcome of these efforts has not managed to budge the number beyond a single percent change over the past couple of years.

U.S. Laws and Road Crashes

The global report on road traffic crashes published by World Health Organization helps explain one of the primary causes of high fatality rate, U.S. drives too much and the country’s laws are too permissive of deadly.

U.S. law does not require seatbelt use in the back seat, unlike most of the developed countries. Seat belts decrease injury and death risk by about 50% in the front seat and 25% in the back seat, according to WHO.

Drunk driving laws are also lenient compared to European nations and WHO recommendations. Many studies have shown that driving is impaired at lower blood alcohol concentration (BAC) levels than 0.08. WHO recommends enforcing drunk driving laws at a low 0.05 BAC.

Besides, the United States, unlike other high-income countries, falls short to meet all international vehicle standards established by the United Nations. The country’s road safety law does not have generally accepted speed limit restriction of 31 miles per hour on urban roads.

Impact of Road Crashes on Auto Insurance Sector

Over the past decade, both the accident rate and the size of insurance claims have not seen any considerable improvement. These are the largest and most volatile components of auto insurance.

U.S. property and casualty insurers continue to face substantial underwriting losses on commercial automobile insurance and, following a statutory combined ratio of 108% in 2018, the segment is poised for a ninth consecutive year of underwriting losses in 2019, according to Fitch Insurance Ratings Group.

Despite repeated underwriting and pricing actions over multiple renewal cycles, commercial auto remains among the weakest major commercial lines Property and Casualty segments.

“Pricing increases alone have been insufficient,” said James Auden, managing director in Fitch’s Insurance Ratings Group. “The chronic underwriting losses in commercial auto in the last eight years reveal a need for change in several areas including risk selection, underwriting practices, and claims.”

After underperforming for several years, the auto liability market, particularly personal auto, began to turn a corner in 2018. The combined ratio for this line improved 5.1 percentage points year over year to 100.4%. Net premiums earned increased 8.3% while net losses and Loss Adjustment Expense (LAE) increased at a lesser rate of 1.9% and other underwriting expenses increased 7.2%. Overall, the net underwriting loss for this line was $587.6 million in 2018, a significant improvement compared to a $7.3 billion loss for 2017.

Commercial auto liability’s net premiums climbed 17.8% year over year in 2018 as companies had implemented rate increases in this line for 30 consecutive quarters. Despite rate increases, the unprofitable trend continued as net losses and LAE incurred totaled $21.3 billion, while net premiums earned stood at $25.5 billion, resulting in a net loss ratio of 83.5%. 2018 combined ratio was 111.7% and has surpassed the 100 percent threshold in each of the last eight years.

According to the Council of Insurance Agents and Brokers Q4/2018 Commercial Property/Casualty Market Index, the reasons for Commercial Auto’s difficulties were numerous. Increased congestion on the roads, distracted driving, and road quality all led to an increased number of accidents, resulting in more frequent pay-outs. Additionally, those pay-outs were often more severe due to the higher value of modern vehicles and increased litigation costs.

U.S. based State farm Mutual Automobile Insurance reported an earned premium of $42.14 billion in 2019 compared to $43.43 billion a year ago. The company’s 2019 underwriting loss was $763 million compared to an underwriting gain of $1.28 billion in 2018.

The company reported an underwriting loss due to a decrease in premiums and an increase in claims and expenses in comparison to a year earlier. Co’s claim and expenses increased by 1.9% for the year.

U.S.’s third-largest auto insurer has found alternatives to better judge the claim ratio using telematics. In 2015, the company adopted a telematics solution to better analyze driver habit and adjust premiums accordingly. The adoption also helped better understand and predict the frequency ratio and severity ratio of claims.

In the year 2018, the company’s pioneer brand auto segment recorded an underwriting income increase of 98.6% over a course of three years after telematics solution adoption in 2015. The loss ratio of the company’s auto segment also improved from 74.5 in 2015 to 66.2 in 2018.

The insurer’s move is in line with the shift in the industry, like fintech’s role in finance, insurtech seems like the way of moving forward for the insurance industry. Boston based Liberty Mutual Holding also believes technology solutions could enhance their current performance,

The company for the year 2019 reported premiums earned of $38.96 billion compared to $37.91 billion a year ago but also recorded an increase in claims and expenses by about 6%. Liberty Mutual said it’s total combined ratio was 101.7% in 2019.

Liberty Mutual on February 28th announced it was working with Ford Motor Co to value, offer discounts to Liberty Mutual customers who drive a Ford connected vehicle on their safe driving.

“Liberty is committed to deep partnerships across mobility partners including many OEMs to support their customers’ insurance needs of today and in the future,” said Kara Shipulski, Vice President, Strategic Partnerships Group.

The move by the insurance industry aims to see better customer engagement, rewards, and discounts based on the usage and behavior of the driver which in turn should impact the road accident rates across the country.

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Why does Insurance need to invest in Driver Safety Solutions?

Motor Insurance Companies have been battling low profitability for more than a decade now. In 2013, they had to pay £1.08 in claims and expenses for every pound they underwrote (combined ratio more than 1). This situation isn’t expected to change much in 2020 as the recent EY report in the UK estimates a combined ratio of 104.7% in 2019 and 107.6% in 2020. This, coupled with the fact that less than one in two people renew their policy with their current carrier has been the biggest factor in negligible underwriting profits of the motor insurance in the last 15 years.

The primary reason the combined ratio (claims + operating expenses to underwriting revenue) is more than one is that claims make up to 80% of the underwriting value. And things aren’t looking up.

The factors which have played the biggest role in increasing combined ratios, and thereby underwriting losses, are:

    • Low Premiums: Price comparison websites have given the consumers the ability to find the most competitively priced policy. Given that there’s no perceptible differentiation between two competing products or brands, consumers choose low-cost options, and thereby insurers are forced to compete only on price. The PTOLEMUS Mobile Insurance Global Study states that 88% of the motor insurance programs worldwide are based only on low pricing and discount.
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    • High cost per claims: As cars are getting more advanced, the cost of fixation is also increasing. Today, repairing a fender bender requires installing new parking sensors too. For the insurer, this means high claim costs without the corresponding increase in premiums.

Apart from the low combined ratio, the below-mentioned factors have engendered high attrition rate, and thereby low Lifetime Value (LTV) per customer :

High attrition rate: In the first year, insurers need to pay brokerage, but they get to pocket that when the customer renews the policy in subsequent years. This means that insurers make a profit on a customer only in the second, or sometimes, in the third year. But a combination of low customer engagement, commoditization, and access to the most competitive has resulted in more than 50% attrition in the UK. For insurers, this means low Lifetime Value (LTV) per customer.

While Telematics offered hope of measuring risk accurately and allowing personalized pricing, it has struggled with customer adoption. Primarily because though the driver behaviour data is valuable for the insurers, it fails to offer meaningful value to the customers.

When we look at these challenges, not in silos but intertwined factors and shift our point of view to the customers, interesting solutions start taking shape. Driving safety is a mutual interest of both customers (and their families) and the insurers. A recent study by Cambridge Telematics showed that 57% of the drivers wanted their insurers to provide them with safety features and services.

What if we could build technology solutions to help drivers avoid preventable high-risk situations? What if we could do this by leveraging the smartphone he already carries? What if we could re-define the role of motor insurance in the lives of customers?

Accidents happen due to a myriad of reasons like distractions, speeding, fatigue, driving habits (acceleration, braking etc.), and external factors like weather, road conditions, other drivers, vehicle failure etc. But some of these risk factors like speeding, drowsiness or known accident hot-spots can actually be identified or predicted by smartly utilizing smartphone data, real-time traffic information and machine learning. Having identified these risks in real-time why can’t we guide the drivers to be better prepared for or avoid them altogether?

A solution like this from insurers to their customers not only helps reduce claims but also provides them with a platform to meaningfully engage with drivers daily, provide tangible value, and build a long-term relationship with them.

Technology is already enabling new business models in Insurance like UBI, BBI, or byte-sized policies. Vitality has demonstrated that technology can make health insurance preventive. Driving assistance technology has the potential to unlock new service offerings and value-proposition of insurance and re-imaging motor insurance as truly personalized, preventive, customer-centric.