Personal auto is leading the insurance industry down a path of change, for both technology and business. The future will bring accelerated change, with laggards being forced to become fast followers and leaders innovating at a quickening pace as the fruits of their labor pay off. While some of the factors are unique to the line of business, we believe that changes in personal auto will be echoed in other lines over the next five years, starting with homeowners and spreading to the more standardized parts of the small business market.
Personal auto insurers operate in a unique market with a relatively simple, commoditized product, which has made differentiators-pricing and service-all the more critical.
Unlike many other insurance markets, auto carriers frequently move in to, and out of, markets as regulations change to open up those markets or make them more competitive. As a result, auto carriers must be more nimble than many of their counterparts, and must have more flexible business processes and systems to support this.
Additionally, retention is a more critical factor for auto insurers, as customer acquisition costs can be prohibitively high. Many of the technologies that have been put into place or that are coming down the road can help carriers to either reduce costs/expenses/losses or improve retention.
Technology enables the business changes that are occurring and that will occur. These changes will have a significant impact on the bottom line in the form of improved loss ratios, improved retention, reduced claims leakage and much more.
Many key enabling technologies are already used by at least one carrier, though typically in a more limited fashion than what will likely be used in the future.
Personal auto will continue to lead the way for the industry, thanks largely to the continued push towards direct sales. Direct sales often require that carriers leverage technology in ways they haven't before in order to behave more like a sales and service organization than a manufacturer. This may include tools ranging from transactional customer portals to modern, flexible core systems that allow carriers to adapt to new opportunities quickly.
CHANGES
Looking ahead to 2009-2010, Novarica expects that consumers will accept a greater trade-off of privacy for additional savings and convenience. Specifically, more consumers will likely be willing to accept a GPS-based, pay-as-you-go device that divulges at least blinded and/or aggregate information about when and where the insured vehicle is driven. Insurers also may begin offering discounts for the use of advanced GPS devices. These devices, which typically provide speech recognition, text-to-speech, traffic avoidance and hands-free cell phone use, help reduce risk of traffic accidents by keeping the driver's hands on the wheel.
Two factors will contribute to significant increases in adoption of product features, such as declining deductibles and accident forgiveness. First, given the competitive nature of the market, carriers will likely want to follow suit simply to keep their offerings on par. However, it will be the ongoing migration to flexible replacement core systems that will allow a growing number of carriers to offer these types of product features.
Another likely significant change will be the broader availability and integration of various types of data to support the claims process (especially for evaluating fault and liability). Most notably, the expanded use of vehicles' black boxes (which become more sophisticated each year), traffic cameras, in-car "dash cams," etc., will allow better evaluation of fault, comparative negligence and more.
Over the course of the next several years, Novarica also expects overall ratings improvements, primarily due to three factors: First, a strong trend toward core systems replacement means that more advanced rating engines are being put in place at more carriers. Second, business intelligence tools are becoming increasingly sophisticated and common, allowing better analysis of data used to develop rate plans. Finally, predictive analytics are improving to the point that some carriers will start to see benefits not only in claims, but in underwriting as well. Over the longer term, these changes will allow a growing number of carriers to move toward microrating, which will become a competitive necessity itself.
In the very long term, challenges and opportunities exist as well. These include dramatic improvements in safety features that are likely to result in decreased frequency and severity of claims, though some changes may have unique liability issues, such as unknowns around hydrogen fuel tanks or lithium battery fires, or even alternative energy sources for a home, for example.
Further down the road, autonomous (self-drive) vehicles also could help reduce claims. Cell phones with HD-quality video via wireless broadband will be common, and will lead to "on-the-spot" claims, while some vehicles may even report their own first notice of loss.
Nevertheless, the most impactful changes are more likely to be those that are the most basic: improvements to policy, billing, underwriting, and claims systems and capabilities. Given the current states of the economy and insurance market, which is, in turn, leading carriers to push for improved ratios, retention, fewer capital outlays, etc., make no mistake that a big piece of the future for insurers will be improving the fundamentals, which will include these core systems. Perhaps the most visible changes will require some behind-the-scenes changes first.
Chad Hersh is a principal in the insurance practice at New York-based Novarica. He can be contacted at chersh@novarica.com, and a recorded Webinar on this topic may be found online at www.novarica.com/webinars.shtml.
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