When OEM insurance hits the market, auto insurers are left to pick up the tab
What does the launch of GM’s OnStar Insurance mean for the future of the auto insurance market and InsurTech at large?
The recent announcement of General Motors’ (GM) return to auto insurance with the launch of its usage-based insurance program, OnStar Insurance (delivered with American Family Insurance), didn’t come as a surprise in most circles. Back in 2007, GM discontinued a venture into auto insurance due to the financial climate — the Great Recession — and doubts of whether auto insurance customers would actually purchase coverage from original equipment manufacturers (OEMs).
However, following the COVID-19 pandemic, auto insurance customers are showing increasing interest in getting products and services that fit their needs such as pay-per-mile and pay-as-you-drive, giving GM, as well as Tesla, Ford and Lincoln, the confidence to give auto insurance another stab.
This puts traditional auto insurers in a precarious position. On the one hand, OEMs can exceed expectations regarding certain aspects of the auto insurance customer experience, such as underwriting, with a “pay as you drive” model, and accident detection and management, gaining access to real-time alerts and treatment, to create a seamless customer experience. On the other, auto insurers that partner with OEMs will likely have to pick up the tab and bear the financial burden of the policies while losing the frontline relationship with their customers as these will be owned and managed by the OEMs. This poses a real challenge to the future of auto insurance as we know it.
So, what will this new auto insurance experience look like, and where does this leave traditional auto insurers?
OEMs aim to generate a ‘one-stop-shop’ experience to dramatically reduce insurer-customer interactions.
In the age of the Internet, customers expect a seamless experience from all of the vendors and service providers in their lives. Based on the success of Amazon’s and other platform-based business models, OEMs see an opportunity to streamline the auto purchasing experience by joining what were formerly two separate steps in the process, vehicle purchasing and the provision of an auto-insurance offering, with all its implications. As mentioned, this is made possible with in-car telematics technology that will be able to assign each driver a price based on how they drive, where all the vehicle’s data is already automatically available for a quick registration.
In addition, OEMs will likely attempt to leverage in-car data to personalize customer experiences, similarly to how Amazon provides suggestions based on prior searches or purchases. Auto customers will purchase an insurance policy at the dealership so that the entire auto insurance policy lifecycle, including the provision of accident and breakdown assistance and through to resolution, will be carried out while working together with the OEM.
This new reality removes the opportunity for traditional auto insurers to directly engage the customer due to the fact that they are engaged only to provide the financial means for customer engagement. Therefore, in partnering with OEMs, traditional insurers run the risk of becoming ‘white label companies’ by removing themselves from direct interactions with customers and potentially canceling out the impact of their brand.
Partnerships don’t necessarily mean shared business.
The other aspect of this new reality that could catch auto insurers off guard is that OEMs can sell a large portion of premiums due to their frontal engagement with the customer in a market that sells nearly 20 million private vehicles per year, creating ample opportunities for them to win over customers due to the sheer number of policies sold. This creates another challenge for the auto insurer as, due to the new OEM leverage in the market, OEMs could decide to switch auto insurance providers if their terms are not met, thereby potentially taking a huge chunk out of the auto-insurer business.
Not only could this leave auto insurers to deal with a costly claims process, but they will also likely have to pick up the bill when it comes to meeting customer expectations. For example, following either a mild or severe accident or a breakdown, customers can engage the OEM accident concierge model to immediately send emergency assistance or towing services if their vehicle isn’t fit to drive. By delivering a tailored experience to fit the customers’ needs, OEMs can exceed expectations and secure brand loyalty — not only for the vehicle itself but for the vehicle and the insurance plan it includes.
Auto insurers, however, are completely removed from this interaction and are left paying for the towing services (owned by the OEMs) or vehicle damages (restored by the OEMs), potentially leading to key financial losses from extraordinary claims payouts, which technically auto insurers don’t have direct responsibility for as they aren’t an OEM. The cost of these payouts could actually be higher if OEMs will require (which they are likely to) original vehicle replacement parts in return for full policy coverage. As a result, while standing behind OEMs, auto insurers don’t have the same leverage to implement new tools and business models aimed at controlling or managing the customer experience, which could potentially lead to financial losses.
A ‘make-it-or-break-it’ moment for traditional auto insurance?
The introduction of new OEM auto insurance models presents traditional insurers with a notable challenge, which could affect their ability to retain customers in the long run. This will probably move auto insurers to make investments to level up their game, all while keeping their premium costs low to remain competitive in a commoditized market. One way to go about this is by applying data-driven and AI technologies to meet customer expectations with personalized service, thereby maintaining their customer-facing position as opposed to handing it over to OEMs.
Itay Bengad, MD, is CEO & Co-Founder of MDgo, provider of Accident Detection & Response (ADR), which uses advanced crash sensors that autonomously send detailed auto accident information to first responders and an in-depth objective damages report to insurers within moments of impact. The opinions expressed here are the author’s own.
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