The insurance industry isn’t known for making sweeping changes. That’s because customers want simple, reliable, and recognizable products. They want to purchase something once and forget about it until they need it. However, a new concept called on-demand insurance is on the horizon of the insurance industry, thanks to big data, mobile computing, and millennial tastes.
On-demand insurance is simply a different way to protect assets. It’s good for insurance professionals to learn about the product so they know which customers it would suit best. Consumers want to stay informed as well.
What Is On-Demand Insurance?
Traditional insurance offers products for blocks of time and, largely, blocks of risk. A renters insurance policy covers all of the policyholder’s belongings in the apartment for an agreed-upon period — usually six months or a year. An auto policy bases its premium on the driver’s previous record, and the policy is in place for several months at a time.
On-demand insurance is driven by consumers who choose to purchase insurance via their smartphones or online and don’t want traditional face-to-face meetings with insurance brokers. This market is in the infancy stage, but there are three common features that differentiate on-demand policies from traditional products:
- Continuous Underwriting. Real-time communication, market analysis, and in some cases, client monitoring allows potential clients to purchase policies on-demand and often adjust rates on extremely short time frames.
- Microinsurance. This is insurance for smaller time periods, smaller items, or both. An on-demand renters policy might cover just the holder’s laptop used for work but none of their other possessions. Other policies might be purchased for two weeks of a vacation to a high-crime area or for the weekend of a big event.
- Graduated Coverage. Important to the gig economy, an on-demand policy charges different rates for an Uber driver for the hours in which they drive for Uber, the hours spent driving for personal use, and the hours the car sits idle in the driveway.
As of January 2020, on-demand insurance is in its early stages, and just a handful of large insurance companies have started to use it. If the market proves as rich as investors predict, it won’t be long before the traditional insurers dive in.
Example In Action
Since on-demand insurance is a new concept, it’s important to offer some examples. Let’s take the example of a simple auto policy:
- A Traditional Auto Policy: A traditional policy includes an agreement for a set period of time (say, six months), setting a premium rate for that period. This rate is based on indicators of the driver’s fitness, such as age, driving record, credit rating, and vehicle usage. The rate is set and locked, and (assuming the insured keeps their monthly premiums current), continues unchanged in its coverage until the six months are over and the policy is renewed.
- An On-Demand Auto Policy: An on-demand policy is a fluid agreement. For the most part, the premiums are decided and billed month by month. That means the premium can change each month. If the policyholder used their car for work 20 hours in one month but only five hours the next, their premium would be lower during the second month. It’s also possible for the policyholder to increase or decrease coverage themselves using an app. For example, they could add roadside assistance for a month when they plan to take a road trip.
Since the concept of on-demand insurance is so new to the marketplace, many of the details will vary from providers and change as the product evolves in the industry.
The Pros of On-Demand Insurance
On-demand insurance provides a suite of benefits both for customers and insurance agents offering these products. Although many customers still prefer the traditional insurance model, millennials and younger clients are responding to this new flexible product.
- They can purchase the necessary insurance without being forced to purchase more than they need.
- More detailed calibration of rates equates to fairer payment levels.
- The companies embracing this model are more customer-focused than some traditional insurers.
- It’s convenient to make all transactions via online and by smartphone.
- Coverage can be increased when needed most.
- Coverage can be released when no longer needed.
- It’s possible for lower-income clients to cover only mission-critical belongings.
- Most products pay out benefits within hours of filing a claim.
- Rapid underwriting means fewer lost leads.
- Apps automate client communication to serve more policies in less time.
- They have access to demographics who previously went without insurance.
- Claim investigation is easier through real-time monitoring.
- It facilitates a distributed workforce, reducing overhead.
- The business model is less expensive, allowing competition on price.
The Cons of On-Demand Insurance
Although it’s an exciting innovation, on-demand products also come with a number of drawbacks. We aren’t listing them here to persuade you against the trend, any more than we presented the pros to convince you to embrace it. The information should help you make an informed choice about what kinds of insurance to purchase or offer.
- Privacy is a concern. The tracking provides insurers with an unprecedented level of information about their clients.
- Not all information recorded will be interpreted properly. For example, it may be hard to tell the difference between hard braking on occasion to avoid an accident with an irresponsible driver versus hard braking regularly as a symptom of bad driving.
- Lack of an agent can mean having less information with which to make an insurance decision.
- It requires more attention and action than traditional, long-term, and monolithic policies.
- Policy payments vary month by month, which can impact budgeting and create unpleasant surprises.
- State-by-state licensure can be problematic with location-independent sales.
- The leading providers at this time do not use agents, allowing them to cut deep into pricing. This can be disruptive — or even destructive — to the business model of traditional insurers.
- The infrastructure requires upfront investment for systems and training.
- Not all information recorded will be interpreted properly (this item is a con for both customers and insurers).
What Happens Next?
Aspects of on-demand insurance have been in place for years. For example, most workers’ compensation policies change rates with monthly or quarterly adjustments based on an employer’s safety record. At the consumer level, driving monitors used to qualify for lower insurance rates have been a regular offering from mainstream, traditional insurers for some time.
Overall, though, on-demand insurance is its infancy, representing less than 1% of the global insurance market. It remains almost exclusively the realm of startups and other hungry, risk-taking insurers.
However, it may not be such a risk. Funding rounds for on-demand insurance startups exceeded $50 billion last year, and more than 90% of millennials polled by Mitchell International said they would be interested in such products. It’s possible this model is here to stay and likely it will grow from its current market share over the next few years.
You don’t have to offer on-demand insurance to remain viable in the insurance industry. Most of your existing customers, and plenty of new clients, still prefer traditional insurance. But if you want to remain relevant, you should become familiar with the concept and keep an eye on this trend. You want to be able to argue the pros and cons while providing the best possible advice to your clients.