The travel and real estate industries offer useful analogs:

• Both feature highly variable pricing, based on the airlines' complex rules that are understood by few; or the nearly limitless number of variables for real estate, from the old saying "location, location, location," to house-specific characteristics, to a buyer's ability to acquire financing.

• Both the travel and real estate (including mortgage) industries still offer an indirect sales model through an agent, although in travel, it has clearly dwindled to specialty or business travel.

• In real estate, however, 83% of home buyers used a real estate agent in 2014; and the mortgage industry has recovered with nearly 50,000 loan brokers in the United States, bringing together buyers and lenders.

• The path to purchase for real estate involves online (including mobile) and offline interactions, both with choosing home and mortgage. Recent research has found that 92% of buyers use the Internet in their home search processes while 50% of buyers use mobile websites or apps in their home searches.  And tens of millions of unique visitors each month visit real estate or mortgage-comparison sites as part of their research prior to meeting with a mortgage broker or banker.

A recent research report conducted by Consumer Reports ("The Truth About Car Insurance," August 2015) shines a light on the complexities of Auto insurance that makes it different than almost anything else consumers regularly purchase.

A key passage from the report: "What we found is that behind the rate quotes is a pricing process that judges you less on driving habits and increasingly on socioeconomic factors … (and) thanks to big data, companies have a lot more to dig into … You're legally obligated to buy car insurance if you want to drive, yet the business thrives on withholding critical information from customers … Complexity and lack of transparency in car insurance pricing keep consumers from knowing which car insurer charges a lot and which one charges a little."

So transparency is the answer. Seems like an easy enough solution, right?

Yes — and no.

 Next page: Why insurance is different

(Photo: Thinkstock)

Why insurance is different

Insurance is mandatory, regulated by individual states, and is complex and critical. Bad insurance is like a bad airline — consumers avoid it.

While it's very easy to go online, comparison shop and then buy most consumer products, few consumers are choosing to do the same for for Auto insurance. As the Consumer Reports research shows, you're as likely to be judged on factors hidden in your credit score through a proprietary formula used by insurers ("car insurers are also rifling through your credit files to … predict the odds that you'll file a claim") as you are for your driving history.

Auto insurance is tightly regulated, and 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.

Within that web of providers and their preferences for consumer segments, there is still further complexity  — such as the proprietary FICO-like score outlined by Consumer Reports — that dominates the actual pricing of any individual policy. These are either completely unknown or poorly understood by consumers and ultimately, make online price comparison challenging. The ability to easily understand and compare prices is entirely necessary for the long-term health of a market that is vibrant and profitable for providers and still cost-effective for consumers.

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 ticket to Raleigh-Durham online based on a few specific data points than it is to make an accurate prediction of car insurance rates.

 Next: Four challenges and solutions to Auto insurance pricing

(Photo: Thinkstock)

Here come the challenges 

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 — and there are many, as auto insurance advertising grew nearly 8% last year, the most of the top 10 advertising categories — 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 (the criteria which establishes for that specific carrier the expected losses from covering a specific consumer).   

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.

Solution: A marketplace approach can instead capture all necessary details willingly from consumers to enable participating insurers and agents to engage consumers in an accurate and detailed dialogue before presenting pricing. Through integrations that securely deliver that data regardless of referral and/or presentation format (online, email, phone, etc.), a marketplace environment minimizes the consumer effort required to provide their information while maximizing insurer participation, regardless of format. Therefore, the marketplace actually maximizes the consumer's opportunity to find the best rate.

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.

Pricing varies wildly for a 22-year-old who is barely making ends meet at his or her first job, driving a 1999 Dodge Stratus, versus a married 45-year old with significant income, two new luxury sedans and a daughter who has just started driving.

Sorting out the best choices for these coverage components is daunting. Many comparison website proponents mistakenly equate Auto insurance products with simple, singular commodity items such as an airline seat or a toaster — and in doing so, ignore that 80% of consumers who start their Auto insurance shopping experience online today end up offline on the phone or in person with an insurance professional ahead of a purchase, despite the broad availability of direct online purchase from most major carriers.

Solution: A true marketplace is one that strives to facilitate the delivery of insurance from providers to consumers in the most effective way possible. In the case of Auto insurance, this means an environment that helps smooth the speed and access to pricing from multiple providers for comparison, while also facilitating the desired and necessary dialog between consumers and insurance professionals. At the end of the day, this is still very much business that is done person-to-person. A marketplace brings value for consumers by providing a single point of entry for the easy procurement of comparative quotes from multiple providers, each of whom can quickly assess their needs and package their product offerings correctly in a way that simplistic online price shopping environments do not facilitate or promote.

(Photo: Shutterstock)

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. 

For many insurers, the value of investing IT and development resources to facilitate interactions with simplistic, lowest price, commoditized shopping environments is entirely unpalatable.

The result? Comparison shopping sites suffer from a lack of participation and the ability to truly offer the best options to consumers. In fact, optimistically, such sites represent less than 50 percent of the available insurers and products in any given state.

Solution: A marketplace pragmatically leverages all means to make the connection and handoff for a consumer to the best insurer and agent options as seamless and efficient as possible.

It will display online pricing online when available, but uses data science to suggest offers "most beneficial to the consumer" and will still require consumers to pick up the phone and call the carrier or the agent — or make an additional click or two to reach their final (and more often successful) destination.

The upside? Greater choice for the consumer, and the ability for agents to get online, a point we will address next in Problem 4.

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 report from comScore showed that "purchasing through a local agent in person remains the most popular purchasing channel," at 41%, with online trailing at 20%.

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.  

Solution: While hundreds of insurers wrestle with these business model challenges, a true online marketplace that embraces both indirect and direct sales models will succeed. This approach creates a platform where new and long-term sustainable life can be injected into those insurers who rely on agents by giving those agents access to online shoppers, while supporting both online and offline options efficiently and seamlessly — thereby increasing pricing and transparency for consumers.

Surprisingly, so-called "millennials" — young adults born after 1980 — may provide the best path-to-purchase model for a marketplace embracing both carriers and agents, and online and offline interactions. Research from Verisk showed that nearly 70% of millennials initiated Auto insurance purchases online — but according to J.D. Power, nearly 45% of them ultimately buy through an agent.

Challenging, but not impossible

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.

Information, access, transparency and choice; these are why consumers shop online — and shopping for automotive insurance should be no different. Only a model that embraces these tenets to create a comprehensive, seamless online/offline marketplace and handoff will truly provide consumers what they need when shopping for auto insurance online.

Tomas Revesz is the chief technology officer and co-founder of Cambridge, Mass.-based EverQuote.