Car
Insurance--and Everything Else-- by the Mile
The
pandemic may have ended the idea of "one size fits all" pricing in
the auto insurance business--and others will surely follow.
I wrote recently about the pros and cons
of "all you can
eat" pricing and mentioned how the very idea of paying extra to make
"long distance" phone calls (which cost the phone companies not a
penny more to provide) had disappeared almost overnight when telcos decided
that they could actually reduce costs and make more profits by
charging everyone a flat monthly rate for their calls. Distance didn't matter.
The strategy was to have the vast majority of
their customer base (who infrequently made long distance calls) essentially
subsidize the few who did by charging every caller a little bit more per month
than they otherwise would have paid, regardless of usage. Of course, being the
greed heads that they were, their marketing people later decided that they
could also start charging customers for substantial data usage (another "invented"
cost) to further improve their operating margins.
This idea of cross-customer subsidization has
been with us for decades in any number of industries. The math is obvious to
many, but since the impact on any given individual consumer or customer was
modest (and the class action lawyers were apparently asleep at the switch), no
one ever really addressed the issue. The providers, of course, weren't gonna
tell anyone about it.
But then in March, 2020 the world stopped
driving; the auto insurance industry will never be the same. In fact, one of
the few silver linings of the pandemic is how quickly it highlighted the
unfairness and high cost of the auto insurers' "one size fits all"
pricing schemes. No one was driving anywhere, and accident claims virtually
dried up - but the premium bills for the same old coverage kept coming.
I thought this would happen years ago. In
2014, I wrote:
"We're looking at the end of fixed
pricing for anything and entering an a la carte/all the
time world. Bulk packaging, bundled products, and even bargain pricing are
all breaking down in favor of a single consumer demand driven by a desire for
freedom of choice and flexibility - I want "everything by the bite" -
whatever I want, whenever I want it, and wherever I am."
I assumed that better technology, more data,
and improved measurement and tracking abilities -- all of which would better
educate and inform consumers -- would almost require bundlers, full-line
forcers, and subsidizers to 'fess up and create more accurate, honest and
transparent pricing. In the car insurance biz, the distance you drove still
made a big difference from an underwriting perspective, which naturally the
insurers had no desire to explain to their insureds. No ask, no tell.
The idea that, geographic considerations
aside, you would be expected to pay exactly the same amount annually for your
auto insurance (obviously depending as well on your age and the value of your
car) whether you drive 2,500 miles a year or 25,000 miles is simply nuts.
Low-mileage drivers were simply subsidizing the premium costs that daily,
distant commuters and other long haulers would have had to pay even though the
low-mileage guys represented substantially less risk. It took a pandemic to
finally make the inequity and injustice of this kind of pricing obvious and,
months after the fact, the big insurance companies grudgingly started offering
some modest prospective premium relief.
But the cat is now out of the bag for the
whole world to discover. One of my favorite descriptions of entrepreneurs is
that they see what everyone else has always seen and think what no one else has
ever thought. In this case, there were already a couple of first movers trying
to offer variations of pay-per-mile insurance, but the smart consumers
ultimately go with the best solutions, not necessarily the guys who got there first.
And, even more importantly, especially in any part of the
insurance business, you've got to get the math right from the get-go, so your
numbers and your business model make sense.
My favorite new horse in this race (the big
guys like Allstate and Nationwide are already coming up with competitive
offerings which, I would note, cannibalize their own books of business)
is Mile Auto in Atlanta. It's
still early days in the contest and they're as much a first mover
as anyone else
but doing it much smarter. Here's why.
(1) Math matters. They've
got better numbers than their direct startup competitors in terms of loss
ratios and churn. Their marketing spend and customer acquisition costs are a
fraction of what the competition is spending.
(2) It's about smarts, not
steel. Their patent-protected solution doesn't require installed or attached hardware,
which is a cost as well as a maintenance and compliance killer in today's
SaaS and cloud world.
(3) Bet on the jockey, not
the horse. The
management team has decades of automotive and tech experience with a major,
successful exit, specifically in telematics, which is critical to continuing to
build on their solutions and stay ahead of the competition.
(4) It's cheaper to ride
someone else's rails. They have a sales and marketing model (B2B2C) which
is clearly superior and far more cost effective than trying to go direct to the
consumer. They're partnering with large industry players who have already
invested millions in establishing direct links to the end users. Channel partners
with large user populations and existing
delivery platforms are clearly the way to go, especially when your offering is an add-on
benefit or solution.
(5) Don't make unnecessary or
gratuitous enemies. In highly regulated industries like automotive and
insurance, it's much better to ask for permission than forgiveness. Forty years
ago, when I founded CCC Information
Services,
which provides vehicle valuation information and other services to the auto
insurers, I asked the industry regulators in key states to
regulate my new data service when they didn't even understand computer
databases or what I was trying to do. Those early approvals provided decades of
protection and barriers to entry from potential competitors. The Mile Auto
guys are already approved or on file in the states that represent 50% of the
auto biz and they're seen as consumer-friendly government and regulatory
partners rather than disruptive assholes. Uber spent years and millions of
dollars fighting unnecessary battles because it attacked the market rather than
aligned with it.
(6) Pick great brand partners.
There's no better remedy for consumer decision fatigue than a strong brand and
there are few "best of breed" brands that are strong with high-end,
luxury, low-mileage drivers than Porsche, which was Mile Auto's first
gold-medal marketing partner.
As everyone knows, there are no sure things in
the business of starting new businesses, but I like the odds of companies like
Mile Auto that did their homework, identified a gigantic shortcoming in the
offerings for low-mileage insureds, built a strong and stable product to
address those unmet and underserved needs, took their time and developed a
novel go-to-market plan, and then rolled things out carefully, strategically
and with the support and blessing of many of the key players in the market.
Mile Auto and per-mile pricing is just the
latest step forward in the global democratization of tech and data. These days,
anyone can rent as much or as little cloud and computing capacity from AWS as
they wish, rivaling the millions of dollars of software and hardware that even
major players needed to spend just a few years ago to enter important markets
like insurance, automotive, and medicine. The moral of the story is that now
everything is "better by the byte".
MAY 11, 2021