The reality of creating an auto insurance product
Insurance has a unique regulatory environment, which cannot (and should not) be ignored.
If you’re an up-and-coming automobile manufacturer (or InsurTech) looking to break into the auto insurance space, you may want to read this. Insurance isn’t like manufacturing, it’s not like retail, it’s not like banking, it’s not like anything else. But if you know a few things about the industry beforehand, you can save yourself a lot of grief later on.
If I were an automobile manufacturer and wanted to build an insurance product for my cars, it would be conceptually straightforward. I would come up with the unique coverage for my specific type of car and then price it accordingly based on the characteristics of my automobile. However, the reality is quite a bit different for some very specific reasons:
- Insurance is regulated by 50 independent departments of insurance.
- You don’t get to arbitrarily decide what you offer and what you charge, unlike some other industries.
- Insurance isn’t simply about my vehicle. There are other vehicles and coverages (such as physical damage, medical payments and liability) to consider
- My new car is an unknown and in terms of loss history, a biased study isn’t enough to establish the cost of claims. Time is required to gain loss history data
Why so many departments of insurance?
Imagine if insurance was regulated like banking through a national agency such as the Securities and Exchange Commission (SEC). In Washington, D.C., government is theoretically run through the equal and level-headed representation of each state through Congress and the House of Representatives. In practice, that’s not really how it works and certain large states (by population) have more influence over some issues.
This is a massive problem for insurance — more importantly for insureds — because insurance needs vary tremendously by state. Take, for example, the automobile hurricane damage coverage needs in Nebraska, Indian, Michigan and any other non-hurricane zone state. Similarly, consider how much important snow and earthquake are for rating automobile coverage in Florida. Add to it the actual risk profile for states. How many cars are there in California compared to Montana? How many serious accidents in Maine compared to New York? This is like saying the same exact vehicle model you manufacture is fundamentally different depending which state you’re in.
Insurance is not a manufactured item that’s used by someone similarly no matter where it’s used. Insurance is protection with specific uses and is highly regulated for good reasons.
And I didn’t even get into the state-specific legislation like the Michigan unlimited personal injury protection coverage. This is like saying that your Michigan car must get 125 miles per gallon on the freeway (but only in the state of Michigan) — go figure it out. Good luck.
Complicated product design
Further complicating auto insurance — as compared with manufacturing the automobile — is that you’re not just designing your own vehicle. You have to design your auto insurance product around the needs of almost every other car.
Insurance isn’t just about damage to your own vehicle — it’s about liability and the damage that can happen to other vehicles and people. In the case of liability, your self-driving vehicle may hit a pedestrian unintentionally or get into an accident with a vehicle that is not the same kind as the one you built your insurance product for. This obviates the value of an automobile-specific product. It’s fine if every car on the road was the same as yours, but that’s not reality. Furthermore, you’re not just covering the car, you’re also covering the driver. Drivers aren’t manufactured.
Whether you’re building a car or an application to streamline buying insurance, these elements of the insurance industry are critical; it’s not enough to understand the technology. Insurance has a unique regulatory environment, which cannot (and should not) be ignored. If you prepare properly, your differentiation may well be in how you adapt to it for your product.
Frank Neugebauer is a partner with Capco. He can be reached at Frank.Neugebauer@capco.com. These opinions are the author’s own.
Also by Frank Neugebauer: Computer vision in insurance: See the future now