Insurers face a dilemma. In a digital age, they want to offer personalised products on-demand rather than generic policies once a year. But if policyholders can buy insurance just when they need it, will insurers suffer from adverse selection, with customers only buying when they want to make a claim?
The on-demand concept is coming to insurance. Challenger firms including Trov, Cuvva and Slice already offer a mobile app with which it is possible to buy as-needed insurance for personal belongings and travel, as well as by-the-hour car insurance. Customers pay only when they’re using the asset to be insured, so they don’t have to pay for cover they don’t need. And it chimes with the way increasing numbers of people live their lives - especially in the millennial demographic. They choose to borrow or rent assets such as a car when they are needed, often “as-a-service”, rather than making an expensive purchase they will use only sporadically.
Facing down adverse selection
How, then, do insurers tackle the problem of adverse selection if consumers can take out insurance as and when they need it?
Technology will be part of the solution, providing a means for insurers to monitor when policyholders are using the asset insured. The rise of telematics in the motor insurance market shows just what is possible; a small device installed in policyholders’ vehicles provides a data feed to the insurer. With on-demand cover - for a ‘hobby’ motorbike, say - this device could be an automatic and unimpeachable means with which to switch the policy on and off.
However, this sort of monitoring won’t always be possible. Take gadget insurance, for example, where fraud appears to be an easy option. How do you stop people buying on-demand mobile phone insurance on the day they smash their phone?
If monitoring isn’t a solution then insurance firms need to work to change consumer perception of their brand and the industry as a whole. People feel comfortable over-claiming or even submitting false claims as they regard their insurers as equally willing to rip them off. Emerging disruptors such as Lemonade and Friendsurance are seeking to combat this with a different business model. They earn their revenue upfront, taking a declared cut of the policyholder’s premium; the remainder goes into a pool – anything left over each year after claims are met is paid out, either to charity or policyholders themselves. The theory is customers will be less likely to cheat if they know it is other people like themselves or a good cause that they’re defrauding.
Building brand engagement
Such models may not suit incumbent, large-scale insurers. Nevertheless, on-demand cover offers insurers an opportunity to build a rich relationship with their customers that they don’t currently enjoy.
After all, today’s business model is bad for the brand: insurers may have contact with their customers just once a year and are forced to compete on price, often offering loss-leading first-year premiums to win business subsidised by policyholders who remain loyal. On-demand insurance, by contrast, involves the customer on an ongoing basis, encouraging them to understand the brand and the value it offers.
Over time, that relationship has the potential to evolve, with customers developing loyalty for an insurer’s brand in a way that is unimaginable in today’s commoditised marketplace. Insurers will build on this engagement, offering additional products that are priced competitively thanks to the reduced cost of acquisition existing customers represent. In turn, these new products will broaden and deepen the relationship.
In this environment, moreover, adverse selection is less likely to be a problem. It is poorly engaged customers who are more likely to cheat – and then take their business elsewhere.
On-demand insurance, in other words, does not have to lead to adverse selection. Insurers that get it right will be rewarded for meeting the needs of today’s consumers with greater trust and ultimately, loyalty.
This article was published in City AM, 20th April 2018.
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