Currently, there is no comprehensive, comparative pricingtransparency for Automobile insurance in the United States. This isa daunting challenge brought about by a number of factors. Whilenone of them are insurmountable, many of them will change slowlyover time.

These factors certainly include a reticence among some of theinsurers in the industry to enable such anenvironment. Admittedly, some of the insurers' concernsare valid, both for the quality of the consumer experience whenselecting insurance, as well as for the health of their businessesand the industry at large. 

Consumers are ready to go online for car insurance. More than 71% of those who shopped for new carinsurance sought out quotes from online sources. Yet consumerscontinue to turn to agents when it's time to purchase. As a matterof fact, research has found that 80% of consumers who start their Auto insuranceshopping experience online end up having the final purchase handledby an agent or call center representative. 

A flexible, marketplace-based online-to-offline model for theprocurement of Auto insurance is a great strategy for both themarket — carriers, independent agents and consumers— and for adapting to the market as it evolves to new waysof operating.

The travel and real estate industries offer useful analogs:

• Both feature highly variable pricing, based on the airlines'complex rules that are understood by few; or the nearly limitlessnumber of variables for real estate, from the old saying "location,location, location," to house-specific characteristics, to abuyer's ability to acquire financing.

• Both the travel and real estate (including mortgage) industriesstill offer an indirect sales model through an agent, although intravel, it has clearly dwindled to specialty or businesstravel.

• In real estate, however, 83% of home buyers used a real estate agent in2014; and the mortgage industry has recovered with nearly 50,000loan brokers in the United States, bringing together buyers andlenders.

• The path to purchase for real estate involves online (includingmobile) and offline interactions, both with choosing home andmortgage. Recent research has found that 92% of buyers use the Internet in their home searchprocesses while 50% of buyers use mobile websites or apps in theirhome searches.  And tens of millions of uniquevisitors each month visit real estate or mortgage-comparison sitesas part of their research prior to meeting with a mortgage brokeror banker.

A recent research report conducted by Consumer Reports ("The Truth About CarInsurance," August 2015) shines alight on the complexities of Auto insurance that makes it differentthan almost anything else consumers regularly purchase.

A key passage from the report: "What we found is that behindthe rate quotes is a pricing process that judges you less ondriving habits and increasingly on socioeconomic factors … (and)thanks to big data, companies have a lot more to dig into … You'relegally obligated to buy car insurance if you want to drive, yetthe business thrives on withholding critical information fromcustomers … Complexity and lack of transparency in car insurancepricing keep consumers from knowing which car insurer charges a lotand which one charges a little."

So transparency is the answer. Seems like an easy enoughsolution, right?

Yes — and no.

 Next page: Why insurance isdifferent

(Photo: Thinkstock)

Why insurance is different

Insurance is mandatory, regulated by individual states, and iscomplex and critical. Bad insurance is like a bad airline— consumers avoid it.

While it's very easy to go online, comparison shop and then buymost consumer products, few consumers are choosing to do the samefor for Auto insurance. As the Consumer Reports research shows,you're as likely to be judged on factors hidden inyour credit score through a proprietary formula used byinsurers ("car insurers are also rifling through your creditfiles to … predict the odds that you'll file a claim") as you arefor your driving history.

Auto insurance is tightly regulated, and with different rules and regulations for everystate. It's an incredibly complex and highly configurableproduct offered by more than 300 different companies across theU.S., many of which specialize in packaging and delivering theirofferings to a subset of the market, such as consumers in aspecific region or risk category.

Within that web of providers and their preferences for consumersegments, there is still further complexity — such as the proprietary FICO-like scoreoutlined by Consumer Reports — that dominates the actualpricing of any individual policy. These are either completelyunknown or poorly understood by consumers and ultimately, makeonline price comparison challenging. The ability to easilyunderstand and compare prices is entirely necessary for thelong-term health of a market that is vibrant and profitable forproviders and still cost-effective for consumers.

So why all the mystery?
The act ofunderwriting any individual's risk for most forms of insurance is arich calculation of dozens of variables — and this isparticularly true for Auto. These variables determine the majorcalculus of the market: the balance between premiums paid in andclaims paid out.

These calculations are crucial and determine if the providerwill make a profit or lose money on underwriting operations. Justlike any other business, the goal is to make a profit and do sowithout driving away customers by having high costs. Thesepremium/payout calculations are based on a few not-so-subtlefactors, such as credit rating and driving history, alongsidedozens of other considerations, such as annual mileage driven,garaging address, loss history and other elements that indicate thelikelihood of submitting a claim or causing an accident.

As one might imagine, additional circumstances drive pricingtoo. Pricing will differ greatly between a casual driver who goesto-and-from the supermarket in a rural area once a week and a dailycommuter who goes 20 miles in the stop-and-go traffic of a denselypopulated urban area. Add that to individual driving history, thetypes and levels of coverage desired at purchase, and thestatistical commonalities for genders, careers, vehicle ages,safety features, regional weather events and dozens more— and one understands the complex nature of the beast.

In order for Auto insurance to continue as an industry, allvariables must be examined to strike the proper balance between acompetitive price for the consumer and a reasonable ability to makea profit for the insurer.

Therefore, having a comprehensive set of information about aconsumer is critical in order to make a pricing decision that isboth competitive and profitable. And to date, this hasn't alwaysbeen possible by entering a few facts on a website.  Inshort, it's much easier to quote the price of a round-trip ticketto Raleigh-Durham online based on a few specific data points thanit is to make an accurate prediction of car insurance rates.

 Next: Four challenges and solutions toAuto insurance pricing

(Photo: Thinkstock)

Here come the challenges 

1. Third-party comparison sites

Insurers are willing to present pricing online to consumers, asevidenced by their own online quoting environments. However,despite ad claims to the contrary — and there are many, as auto insurance advertisinggrew nearly 8% last year, the most of the top 10 advertisingcategories — they are far less willing toshow quotes on third-party websites. Some will, some won't. Why? Inthis author's opinion, because doing so would dramatically limitinsurers' abilities to confirm that the inputs supplied bythird-parties were carefully, thoughtfully and securely gatheredand validated — and are trustworthy enough to deliver tothe consumer an accurate rate against that specific carrier'sunderwriting criteria (the criteria which establishes for thatspecific carrier the expected losses from covering a specificconsumer).   

Comparison shopping websites force carriers to make their peacewith these concerns in order to participate, while at the same timestriving to constrain the length of their questionnaires andsimplify the depth of information gathered.

Unfortunately, this creates a conundrum: With minimalinformation, comparison sites still demand participating insurersguarantee the rate they offer up for display, potentially forcingthem to lose money by quoting a rate that's too low; or they allowthem to vary the initial quoted price and final quoted price,potentially upsetting consumers.

Solution: A marketplace approach can insteadcapture all necessary details willingly from consumers to enableparticipating insurers and agents to engage consumers in anaccurate and detailed dialogue before presenting pricing. Throughintegrations that securely deliver that data regardless of referraland/or presentation format (online, email, phone, etc.), amarketplace environment minimizes the consumer effort required toprovide their information while maximizing insurer participation,regardless of format. Therefore, the marketplace actually maximizesthe consumer's opportunity to find the best rate.

2.  Auto insurance is really, really complex,with many options

The features and options of an Auto insurance policy are farmore complex than those involved buying a plane ticket or theaforementioned toaster. A better analogy: Buying an Auto insurancepolicy is like putting together a whole vacation trip or a completekitchen full of appliances, the components of which wildly affectthe cost and ultimately the value and quality of the experience,and vary greatly based on the circumstances of the particularconsumer and their needs. A quick weekend trip with college friendson the cheap for a 26-year-old is very different from a weeklongDisney vacation for a family of five. A refrigerator for anapartment a landlord plans to rent out is much different than aViking range and stainless steel appliances for a foodie'sbrand-new dream kitchen.

Likewise, the variety of coverage levels for Auto insurance aremany: collision, bodily injury, breakdowns and roadside service,towing, deductibles, personal property, old car versus new, singledriver versus multi-driver, etc. Add in the fact that certaincarriers are more competitive when Auto is packaged withHomeowners' insurance and you quickly realize the complexity andhow hard it is to easily quote an accurate price.

Pricing varies wildly for a 22-year-old who is barely makingends meet at his or her first job, driving a 1999 Dodge Stratus,versus a married 45-year old with significant income, two newluxury sedans and a daughter who has just started driving.

Sorting out the best choices for these coverage components isdaunting. Many comparison website proponents mistakenly equate Autoinsurance products with simple, singular commodity items such as anairline seat or a toaster — and in doing so, ignore that 80% of consumers who start theirAuto insurance shopping experience online today end up offline onthe phone or in person with an insurance professional ahead of apurchase, despite the broad availability of direct online purchasefrom most major carriers.

Solution: A true marketplace is one thatstrives to facilitate the delivery of insurance from providers toconsumers in the most effective way possible. In the case of Autoinsurance, this means an environment that helps smooth the speedand access to pricing from multiple providers for comparison, whilealso facilitating the desired and necessary dialog betweenconsumers and insurance professionals. At the end of the day, thisis still very much business that is done person-to-person. Amarketplace brings value for consumers by providing a single pointof entry for the easy procurement of comparative quotes frommultiple providers, each of whom can quickly assess their needs andpackage their product offerings correctly in a way that simplisticonline price shopping environments do not facilitate orpromote.

(Photo: Shutterstock)

3.  Incompatible legacy pricingtechnologies

The pricing, provisioning and service infrastructure within mostinsurance carriers has been built on legacy technologies andplatforms designed to service the internal needs of each companyand its agents — with minimal interoperability for anyoneoutside their ecosystem. Even for online, direct providers, systemswere built to meet the needs of their own websites and call centersonly. 

These needs are significantly different from those required tofacilitate an environment for standardized, secure and high-volumeinteractions with third parties who would want to providecomparative price shopping experiences to consumers visiting theirwebsites. 

For many insurers, the value of investing IT and developmentresources to facilitate interactions with simplistic, lowest price,commoditized shopping environments is entirely unpalatable.

The result? Comparison shopping sites suffer from a lack ofparticipation and the ability to truly offer the best options toconsumers. In fact, optimistically, such sites represent less than50 percent of the available insurers and products in any givenstate.

Solution: A marketplace pragmatically leveragesall means to make the connection and handoff for a consumer to thebest insurer and agent options as seamless and efficient aspossible.

It will display online pricing online when available, but usesdata science to suggest offers "most beneficial to the consumer"and will still require consumers to pick up the phone and call thecarrier or the agent — or make an additional click or twoto reach their final (and more often successful) destination.

The upside? Greater choice for the consumer, and the ability foragents to get online, a point we will address next in Problem4.

4. Agents still matter

Just as Zillow hasn't replaced real estate agents, andLendingTree hasn't obliterated mortgage brokers, online Autoinsurance sites haven't replaced agents. In fact, their businessesactually improved in 2014, with 70% reporting increased revenues in 2014, upfrom 60% in 2012. A report from comScore showed that "purchasing through a local agent inperson remains the most popular purchasing channel," at 41%, withonline trailing at 20%.

A majority of the insurance carriers in the United States todaystill operate entirely through an indirect sales channel thatleverages local independent agents as their primary form ofdistribution. Only a handful of carriers don't leverage a localagency distribution channel, while many sell direct to the publicand through a local agent model.

This business model, by its very nature, is in conflict with thenotion of a directly quoted and sold online experience whichprefers centralized call centers and resources for direct selling.The simple existence of online shopping environments and directsales models has not, nor will it in the near term, force thetransition of existing indirect business models to direct ones.Again, comparison shopping environments suffer from a lack ofparticipation — because local agents and even some greatcarrier operations aren't included.  

Solution: While hundreds of insurerswrestle with these business model challenges, a true onlinemarketplace that embraces both indirect and direct sales modelswill succeed. This approach creates a platform where new andlong-term sustainable life can be injected into those insurers whorely on agents by giving those agents access to online shoppers,while supporting both online and offline options efficiently andseamlessly — thereby increasing pricing and transparencyfor consumers.

Surprisingly, so-called "millennials" — young adults born after1980 — may provide the best path-to-purchase model for amarketplace embracing both carriers and agents, and onlineand offline interactions. Research from Verisk showed that nearly 70% of millennials initiated Autoinsurance purchases online — but according to J.D. Power, nearly 45% of them ultimately buythrough an agent.

Challenging, but not impossible

The automotive insurance industry is simply far more complexthan others that have successfully transitioned into onlineselling. These complexities cannot be easily reproduced with acouple of clicks. The only way to truly follow the path blazed bythe travel and real estate industries is to embrace the marketplaceapproach.

By doing so, the industry will not only benefit its agents andlocal agencies — still the backbone of the industry andthe way a majority of purchases are made — but will alsoguarantee that consumers are getting the best price and strongestprotection possible.

Information, access, transparency and choice; these are whyconsumers shop online — and shopping for automotiveinsurance should be no different. Only a model that embraces thesetenets to create a comprehensive, seamless online/offlinemarketplace and handoff will truly provide consumers what they needwhen shopping for auto insurance online.

Tomas Revesz is the chief technology officer and co-founderof Cambridge, Mass.-based EverQuote.