Auto insurance is tightly regulated with different rules and regulations for every state. It’s an incredibly complex and highly configurable product offered by more than 300 different companies across the U.S., many of which specialize in packaging and delivering their offerings to a subset of the market, such as consumers in a specific region or risk category.
So why all the mystery?
The act of underwriting any individual’s risk for most forms of insurance is a rich calculation of dozens of variables — and this is particularly true for Auto. These variables determine the major calculus of the market: the balance between premiums paid in and claims paid out.
These calculations are crucial and determine if the provider will make a profit or lose money on underwriting operations. Just like any other business, the goal is to make a profit and do so without driving away customers by having high costs. These premium/payout calculations are based on a few not-so-subtle factors, such as credit rating and driving history, alongside dozens of other considerations, such as annual mileage driven, garaging address, loss history and other elements that indicate the likelihood of submitting a claim or causing an accident.
As one might imagine, additional circumstances drive pricing too. Pricing will differ greatly between a casual driver who goes to-and-from the supermarket in a rural area once a week and a daily commuter who goes 20 miles in the stop-and-go traffic of a densely populated urban area. Add that to individual driving history, the types and levels of coverage desired at purchase, and the statistical commonalities for genders, careers, vehicle ages, safety features, regional weather events and dozens more — and one understands the complex nature of the beast.
In order for Auto insurance to continue as an industry, all variables must be examined to strike the proper balance between a competitive price for the consumer and a reasonable ability to make a profit for the insurer.
Therefore, having a comprehensive set of information about a consumer is critical in order to make a pricing decision that is both competitive and profitable. And to date, this hasn’t always been possible by entering a few facts on a website. In short, it’s much easier to quote the price of a round-trip plane ticket online based on a few specific data points than it is to make an accurate prediction of car insurance rates.
1. Third-party comparison sites-
Insurers are willing to present pricing online to consumers, as evidenced by their own online quoting environments. However, despite ad claims to the contrary, they are far less willing to show quotes on third-party websites. Some will, some won’t. Why? In this author's opinion, because doing so would dramatically limit insurers' abilities to confirm that the inputs supplied by third-parties were carefully, thoughtfully and securely gathered and validated — and are trustworthy enough to deliver to the consumer an accurate rate against that specific carrier’s underwriting criteria.
Comparison shopping websites force carriers to make their peace with these concerns in order to participate, while at the same time striving to constrain the length of their questionnaires and simplify the depth of information gathered.
Unfortunately, this creates a conundrum: With minimal information, comparison sites still demand participating insurers guarantee the rate they offer up for display, potentially forcing them to lose money by quoting a rate that’s too low; or they allow them to vary the initial quoted price and final quoted price, potentially upsetting consumers.
2. Auto insurance is really, really complex, with many options
The features and options of an Auto insurance policy are far more complex than those involved buying a plane ticket or the aforementioned toaster. A better analogy: Buying an Auto insurance policy is like putting together a whole vacation trip or a complete kitchen full of appliances, the components of which wildly affect the cost and ultimately the value and quality of the experience, and vary greatly based on the circumstances of the particular consumer and their needs. A quick weekend trip with college friends on the cheap for a 26-year-old is very different from a weeklong Disney vacation for a family of five. A refrigerator for an apartment a landlord plans to rent out is much different than a Viking range and stainless steel appliances for a foodie’s brand-new dream kitchen.
Likewise, the variety of coverage levels for Auto insurance are many: collision, bodily injury, breakdowns and roadside service, towing, deductibles, personal property, old car versus new, single driver versus multi-driver, etc. Add in the fact that certain carriers are more competitive when Auto is packaged with Homeowners' insurance and you quickly realize the complexity and how hard it is to easily quote an accurate price.
3. Incompatible legacy pricing technologies
The pricing, provisioning and service infrastructure within most insurance carriers has been built on legacy technologies and platforms designed to service the internal needs of each company and its agents — with minimal interoperability for anyone outside their ecosystem. Even for online, direct providers, systems were built to meet the needs of their own websites and call centers only.
These needs are significantly different from those required to facilitate an environment for standardized, secure and high-volume interactions with third parties who would want to provide comparative price shopping experiences to consumers visiting their websites.
4. Agents still matter
Just as Zillow hasn’t replaced real estate agents, and LendingTree hasn’t obliterated mortgage brokers, online Auto insurance sites haven’t replaced agents. In fact, their businesses actually improved in 2014, with 70% reporting increased revenues in 2014, up from 60% in 2012.
A majority of the insurance carriers in the United States today still operate entirely through an indirect sales channel that leverages local independent agents as their primary form of distribution. Only a handful of carriers don’t leverage a local agency distribution channel, while many sell direct to the public and through a local agent model.
This business model, by its very nature, is in conflict with the notion of a directly quoted and sold online experience which prefers centralized call centers and resources for direct selling. The simple existence of online shopping environments and direct sales models has not, nor will it in the near term, force the transition of existing indirect business models to direct ones. Again, comparison shopping environments suffer from a lack of participation — because local agents and even some great carrier operations aren’t included.
The automotive insurance industry is simply far more complex than others that have successfully transitioned into online selling. These complexities cannot be easily reproduced with a couple of clicks. The only way to truly follow the path blazed by the travel and real estate industries is to embrace the marketplace approach.
By doing so, the industry will not only benefit its agents and local agencies — still the backbone of the industry and the way a majority of purchases are made — but will also guarantee that consumers are getting the best price and strongest protection possible.
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