The auto insurance industry has come a long way since the late 1960s when insurers ramped up competitive advantage by offering safe-driver, multi-vehicle and multi-policy discounts. As consumers became smarter and more demanding, that competitive pressure has had its effects, driving insurers to create variety in tiered and personalized automobile policies that enable consumers to purchase the exact coverage they want, when they want it and how they want it.

To keep up, insurers are now coming up with even more competitive pricing innovations, such as accident forgiveness and no-cost reductions in collision deductibles that increase with the length of an accident-free driving record. And thanks in large part to Progressive, “usage-based insurance” (UBI) or “pay as you drive” (PAYD) insurance has become a common denominator among the large auto insurers fighting for market share. But does all this discounting come at the price of preserving premium revenue?

In a recent report based on its survey of 1,024 U.S. consumers, Aite Group offers up some insight into the state of the consumer and the auto insurance market.

The survey, conducted in October 2011, was designed to match the 2010 U.S. Census proportions for gender, age, income and ethnicity. So the 1,024 respondents represented 953 unique ZIP codes, and at 50 percent male and 50 percent female, the respondents closely reflect approximate national gender percentages. Among respondents, 60 percent own and 34 percent rent the homes in which they live, while 6 percent live with parents or friends. Eighty percent of respondents have vehicle insurance, and 62 percent have homeowners or renters insurance.

The rate at which U.S. insurance customers go policy-shopping (seek competitive quotes against existing policies) has risen steadily since 2008 and currently stands at 35 percent, notes Aite Group.

Yet how respondents’ shop for auto insurance varies. Thirty-five percent of them said they seek quotes at least annually, including 7 percent who do so even more frequently. Another 39 percent of respondents have not sought quotes in the past five years (although this group also includes some who have come of driving age more recently than that), while 25 percent seek quotes every two to five years.

Of respondents who sought quotes over the past five years, 51 percent purchased auto insurance from the quoting carrier. This result clearly illustrates the incentive for carriers to entice greater numbers of consumers to seek quotes, notes the report, and helps explain extensive carrier advertising campaigns aimed at doing just that. Aite Group notes that improving conversion rates could be a matter of expediting the entire quote process via use of data-process technologies such as information pre-fill.

However, the increasing rate (35 percent) of consumers shopping annually for auto insurance, combined with the relatively strong (51 percent) quote conversion rate, implies a problematic 18 percent annual “switching” rate between insurance carriers, notes the report. It also provides a glimpse into the ongoing challenge that auto insurance companies face in finding and keeping their customers.

Aite Group offers the following tips to carriers in this competitive set:

* Know your customer: Successful P&C carriers competing in the $165 billion U.S. auto insurance marketplace will be those who best understand and accommodate the service demands and expectations of the large and growing percentage of the 196 million consumers who purchase these insurance products.

* Develop more product options: Auto insurance customers are becoming surprisingly receptive to new and innovative auto insurance products; 45 percent would consider accepting conditions, restrictions or limitations on their auto insurance in exchange for additional savings of between 5 and 10 percent, and 66 percent of a specific group would consider more restrictive policies to earn 10 percent further savings.

* Leverage consumer appetite for savings: Forty-five percent of respondents indicate a willingness to accept some policy coverage limitations and restrictions in exchange for discounts of as little as 5 percent. This should be a compelling incentive for carriers to develop and offer innovative auto insurance products.

* Become customer-centric: Central to this change is the “new consumer”—always connected, fully informed, active 24/7, with high service expectations—and the emergence of the customer-centric organization across the insurance enterprise.

* Learn to embrace the online channel: Successful carriers and agents will be those who learn to satisfy a growing consumer preference for using these channels to conduct auto insurance transactions.

* Innovate more: The P&C insurance industry has made a concerted initial effort to recognize industry changes and transform itself accordingly, but insurance companies have many separate databases and legacy operating platforms, generally conservative cultures, and historically complicated business processes.

* Get proactive about quoting: Only one-third of consumers seek quotes annually, but half of all consumers who do so purchase insurance from the carrier who provides the quote.

* Develop multiple channels for claims support: Many consumers still favor using a telephone to report claims, but a significant 12 percent (and growing) percentage prefer to do so online at the time of their choosing.

* Support and leverage agency channels: More auto insurance claimants submit claims through agents than they do directly to carriers, which indicates a reliance upon, and preference for, dealing with agents.

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