The current business model of car insurance companies is not sustainable. Well, at least that’s what the industry leaders have been pointing out and preparing for in the past several years. But, if this has been recognized and acknowledged, what’s preventing the car insurance companies from tweaking their business model which would allow them to lower their expenses while simultaneously increasing profits?
Traditional vs. Data-driven Car Insurance
In order to understand why the current business model is unsustainable, we need to look at the expense/premium structure of most car insurance companies today. As shown on the picture above on the left, a total of 30% is spent on marketing, administration, commissions to agents and loss adjustment costs (investigating if the damage actually happened and the severity of it). In addition, 65% is spent for paying true loss costs – such as collision repairer or doctor bills, which leaves only 5% for the technical margin for the insurer to save, invest, or return to the consumers in the form of lower premiums.
In the words of Tesla’s former Head of Insurance Alex Tsetsenekos:
Given the increased data analytics and vehicle technology, this cost structure is simply not sustainable.
In other words, Alex advocates for insurance companies to start leveraging the power of connected car data and telematics to gain a much broader overview of the driving habits of their customers and the possibility to be much more precise with quantifying and measuring risk. By adding anonymized consumer telematic data into the equation, insurance companies could lower their costs which would automatically give them more room to offer competitive premiums, increase their market share, and save customers’ money.
Let’s look at the picture above again. Next to the traditional insurance model, we can see another one that is data-driven. It is immediately clear that the cost of losses could be significantly lowered from 65% to as much as 40% through leveraging connected car data analytics. There are two main levers for such a sharp decrease of costs – better risk prediction and better risk control.
It is vital for insurance companies to pair the existing data they’ve already collected about their customers with telematic data, in order to make contextualized analytics and much more precise risk predictions. By being more precise in risk prediction and risk control, the cost of losses would decline, letting the technical margin to increase from 5% to as high as up to 48%.
There is only one problem insurance companies have when it comes to leveraging connected car data. Storing, processing and analyzing data coming from millions of customers and millions of vehicles in real-time is an extremely complicated task. Insurers would need to deploy a completely new department which would be responsible solely for connected car data analytics and visualizing those complex analytics on the map.
Setting up such a department, which is far from the original scope of work insurers do, could take years without a guarantee that the system that would be created could support extremely large quantities of telematic Big Data. Luckily, there is a second option for the insurers.
A technology that’s capable of analyzing connected car data from millions of vehicles in real-time which would allow insurers to make better risk prediction and better risk control has already been created – it’s called SpaceTime. It comes with map data and extremely powerful analytic capabilities, which eliminates the need for insurers to tap into the world of the unknown of experimenting with telematic data processing.
Instead, insurance companies use SpaceTime to ingest the telematic data into it, along with the data they’ve already collected about their customers, allowing them to test countless risk hypotheses about their customers within seconds and in turn make better risk predictions.
Tesla as an OEM has been moving in this direction of offering car insurance directly to consumers and its CEO Elon Musk believes that car insurance will one day account for a third of Tesla’s whole business. When asked to comment on Tesla’s car insurance, Musk said: “It will be much more compelling than anything else out there. It’s going to cost less and be better, so, why wouldn’t you want to leverage telematic data within insurance?”
There is no doubt that car insurance companies will one day recognize the need for leveraging telematic data and start using them for better risk prediction. The question is, will it be too late?
Click the button below to learn more about SpaceTime and how it’s transforming the car insurance industry.