Automakers About to Shake Up the Insurance Industry

Elon Musk recently announced Tesla’s intent to launch a usage-based insurance (UBI) product in Texas.

The move came after General Motors and Ford launched their own telematics insurance programs and so Ptolemus Consulting Group predicts that move towards embedded connectivity is impacting insurance to the extent that it is going to shake up auto insurance.

Andrew Jackson, research and publishing director of the group, writes about the findings of the 4^th edition of its Connected Auto Insurance Global Study and discovers that “many insurers now write over 40% of new business to connected auto insurance. Furthermore, at least 13 OEMs have launched insurance telematics products in the last two years, all of which utilize built-in connectivity”.

He adds: “When car usage collapsed during the Covid-19 lockdowns, policyholders demanded prices based on actual mileage. OEMs have been stepping into the gap and, in a clear statement of intent, half of all OEM in-house UBI programs use connected car data only, removing insurers and Telematics Service Providers (TSPs) from the equation.”

Active connected car services

His group also finds that at least 17 automakers are actively selling connected car services, and that “dynamically-priced insurance” is already available from the above plus Kia, Hyundai, Mercedes-Benz, Stellantis, Toyota and Volkswagen. Several car manufacturers have also forged partnerships with insurers, and these include Ford with Arity, GM with American Family, For with Octo Telematics, PSA with AXA, and Daimler with SwissRE.

Jackson claims that Elon Musk hasn’t announced anything new as there are other automakers in the market with similar products, including Peugeot and Citroen which has a connected insurance program in France with their in-house insurer, PSA Insurance. GM has also launched ‘Onstar Insurance’ (in the US) and Ford with Nationwide (also in the US). He adds: “Comparatively speaking, the consumer would see not much difference in terms of service provision between any of the examples above but a defining feature of Tesla’s approach is that it is a completely in-house solution.”

Tesla’s offering

It will work by taking data directly from Tesla car owners’ vehicles to enable them to calculate the insurance risk for the drivers in-house and, thus, circumventing the insurance industry. This is in part to overcome the negative press that Tesla has been receiving about autonomous driving, differentiations in ownership costs (i.e. no gasoline or engine maintenance is required) which often mean that insurers are open to more discretionary pricing risks on these vehicles: “Resulting in owners being quoted very high policy prices with a Tesla owner being quoted $500 per month”.

This has been the catalyst for Musk’s response. More to the point, says Jackson, is the fact that Musk is a media magnet. People tend to sit up and listen to him whenever he makes an announcement, even on Twitter. Jackson thinks Tesla’s move is a good piece of marketing for the industry in general. This is particularly because the other UBI policies on the market don’t achieve the same level of fanfare and yet it comes at a time when the UBI market is going to increase substantially in terms of volume of active policies. With this trend comes an increased reliance on technology from the aftermarket towards to just connecting to the data that is generated by the vehicle.

He explains: “Covid-19 has been an opportunity for UBI to demonstrate the advantages of its flexible nature. In the US there have been some lawsuits, which have led to rebates because the premiums the insurers were demanding weren’t changing when the vehicles were off-road.” He reveals that, in the US at least, this has led to the top 10 insurers creating rebate schemes to forestall the lawsuits.

OnStar Insurance

Andrew Rose, president of OnStar Insurance, claims that his company’s insurance scheme is going to be different to what Tesla is offering its customers. It is yet to be launched but it will provide a set of harmonized variables. The traditional risk variables would be hard stops, hard cornering, and speeding over 80mph. With harmonization comes a wider breadth of variables, “such as an ability to understand contextual data from who’s wearing a seat belt to traction control”.

He adds that not all of these harmonized variables will be predictive because OnStar wants to offer drivers a fairer insurance rating. This is based on what its customers are driving and how they drive. Age doesn’t come into it. “What matters is whether they are a better driver or not and, if they are, we want to give them credit,” he explains.

Rose believes this approach will pull GM back into the insurance industry as there is a strong ability for auto manufacturers to play a role in insurance. He argues that the carmakers know their vehicles the best and, on that premise, GM wants to attract its customers to its own insurance policies and schemes. “We want to encourage them to become an OnStar Insurance customer; the other insurance companies can’t lean on OEMs, they didn’t manufacture the vehicles!”, he exclaims.

“In the future, we can integrate insurance, taking safety and security with OnStar to get an instant call in your vehicle to get a first responder to customers. We plan to pull together the OnStar proposition with the OnStar Insurance proposition, allowing to know what’s broken and schedule a repair instantly in five seconds. Most insurance take five weeks to do this and we will also know whether a vehicle is totalled after an accident and know what injuries you have suffered. We could also offer you a new vehicle. Insurers don’t have that, and that’s why we are excited to bring it to market.”

Outsourcing versus in-house

In contrast to Tesla, GM is outsourcing the insurance and actuarial aspects to OnStar Insurance. Tesla on the other hand is in-sourcing, bringing insurance in-house to reduce the cost of insurance policies for the benefit of its customers. Jackson thinks this approach should make a difference to the insurance premiums that are currently being paid by Tesla owners.

In contrast, he says Ford is also “looking at doing a lot in-house too they are taking a hybrid approach in order to gauge what will work best. Ford is a very good example of an OEM that is very active with UBI. But overall OEMs are trying a number of solutions to see what sticks”. Meanwhile, Tesla has several associated UBI programs. For example, in the UK it connects with By Miles, and Jackson explains they started to market that they could connect to any Tesla vehicle.

“The irony is that people are conditioned to Tesla being the first-mover, hence why this announcement has gained attention,” he explains. All automakers, nevertheless, have the opportunity to shake-up the auto insurance market by bringing insurance in-house, which will also inevitably impact the revenue potential of telematics as there would be reduced reliance upon these companies.

Jackson explains why: “If you have an OEM processing the data in-house, and we are not saying that all OEMs will have the technical ability to do so, telematics service and technology providers will see less demand – this includes for transmitting the data.” Smartphone value

With smartphones demonstrating their value in terms of data reliability, and because of their interface with policyholders to allow a direct relationship between insurer and customer, there is still an opportunity for insurers to gain a deeper, more profitable, and longer-lasting relationship with each of their customers.

However, if carmakers bring all of this in-house, the insurers’ commercial opportunity is lost. Auto insurers are, therefore, having to push themselves beyond their traditional conservative mindset in order to stay in the game. UBI has been a niche market to date but it’s the future as it is creating an opportunity to shake up insurance through hyper-personalization to lower costs and to offer a wider range of insurance policies and connected services for the benefit of each customer.

Jackson concludes: “For OEMs, it’s no longer going to be a case of how much “tin” you can sell. So, they are looking at the revenue they can gain from vehicle data. So, you have some insurers sitting on the fence and OEMs that have a wealth of data and developing expertise that they want to leverage/monetize. Not least so the OEM can integrate insurance into a seamless consumer experience. You are also retaining the customers’ future business.”

This makes the traditional view that automobile manufacturers aren’t going to be a threat to insurers redundant. Jackson argues this is because insurance is going to follow the same pattern as the provision of finance, meaning that UBI programs will be offered at first point of sale. This is made possible owing to most policyholders now having a comprehensive understanding of UBI’s benefits – particularly whenever they are not using their vehicles, such as during Covid-19 Stay at Home orders.