Even though Metromile wasgroundbreaking with its pay-per-mile insurance, it certainly wasn'tthe first to provide usage-based cover.

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In fact, the earliest documented paper insurance policy, acommercial policy, dated February 13, 1343, covered 10 bales oflinen on their trip from Pisa to Sicily on the SantaCatalina. It was a pay-per-use policy on a temporary shipmentof cargo — right in the midst of the Italian Renaissance.

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Fast forward 673 years and we are entering an era whereusage-based insurance and pay-as-you-go (drive-live-travel-ship,and more) coverage is coming into vogue. The big difference withthis Renaissance, however, is that technology and insurancecoverage is unlikely to trend back toward aggregates and is highlylikely to trend permanently toward individualized, contextualized,point-in-time based, data and analytics based pricing and use.There's no going back … only forward.

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If the sharing economy with collaborative consumption expands,the on-demand model continues to grow, and thepay-as-you-use model continues to create innovative options, thenit has long-term, dramatic insurance implications — andalmost all of them are positive when looked at in the light ofInsurTech advancements. So, let's briefly consider what usage-basedinsurance means to consumers, what it will do for insurers and howinsurers need to prepare their enterprises to take advantage ofit.

Consumer and the economics of pay-as-you-use

Pay-as-you-use is a common economic principle, couched intoday's technology solutions. The only way it becomes profitable isfor the consumer to see the benefit of variable use, the ease ofuse and variable expense.

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When Metromile introduced pay-per-mile coverage for drivers, itnaturally appealed most to low-mileage drivers who felt that theycould now be treated fairly. They benefitted from less wastedpremium dollars and they were rewarded with a personalizedexperience that made them feel known. (Metromile even goes so faras to warn individual San Francisco drivers about potential parkingtickets during street cleaning days.)

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Today's consumers have constructed, through their preferences, adigitally-savvy, relationship-valuing, on-demand, sharing economy.Airbnb, Zipcar and Snapgoods are turning wasted downtime intoproductive uptime and revenue. These companies and others havetransformed the mobile device into a powerful marketplace ofoptions with stellar and simplified ease of use, standardizedquality of service and transparency of price. These same trendswill drive some consumers to only do business with those who canprovide usage-based coverage.

Insurer and the economics of pay-as-you-grow

Insurers may lament that they are losing premium when the needfor insurance is not in use, but that isn't actually the case. Inmost cases they are just lowering premium at times when there isvery little or no risk … the basic fundamentals of insurance.InsurTech startups are providing ideas to help insurers turn thesharing economy into new market opportunities, revenue and profits.Digital connectivity, relevant data streams and new product modelswill continually allow insurers to prove their pricing and helptheir customers lower their risk.

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The irony of the insurer discomfort is this: Many insurers aretaking advantage of the same pay-as-you-use principles as consumersthemselves. They are sharing system solutions with cloud-basedtechnology. They are paying as they grow, with agreements thatallow them to pay-per-policy or pay based on premiums. They areusing data on demand relationships for everything from medicalevidence to geographic data and credit scoring. They use technologypartners and consultants in an effort to not waste downtime,capital, resources and budgets. They are rapidly moving to apay-as-they-use world, building pay-as-they-need insuranceenterprises.

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This is especially true for greenfields and startups, where a large part ofthe economic equation is an elegant, pay-as-you-grow technologyframework. They can turn that framework into a safe testing groundfor innovative concepts without the fear of tremendous loss, whilehaving the ability grow if the concepts are wildly successful.

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The window of opportunity

It's open again. The window of opportunity is open to insurersthat wish to prepare their business models, products, processes andsystems to embrace the pay-as-you-go culture. In a recent MajescoThought Leadership report on insurance consumers, we found thatconsumers are far more interested in receiving a fair price thanthey are in gaining the lowest price.

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Related: Rebel with a cause: Lemonade CEO calls for radicalchange

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We also found that across all generational groups, autoinsurance based on miles driven showed that 30-50 percent of thesurveyed respondents were willing to look at pay-per-mile autoinsurance and a similar percentage were interested in on-demandinsurance for a specific event, item or time of day across allgenerational groups and led by millennials. Each of these jumped to60-80 percent when the "swing group (those that could shift) wereadded.  (See "The Rise of the New InsuranceCustomer" for more information.)

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The statistics are stunning, considering that those respondentsare all current insurance customers — willing to stay orswitch based upon their feelings of fairness, service, value, andneed. Insurers that aren't already preparing, need to prepare now …and quickly.

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There is no question that the convergence of consumer opinionand the innovative business models and capabilities of InsurTechwill either steer consumers toward an insurer or away from it basedon the insurer's ability to accept non-traditional, tech-enabledproducts. Just look at the high interest and investment byreinsurers and venture capital firms in companies like Lemonade, Slide, Root and TROV … andthe buzz and excitement their brands are generating in themarketplace.

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Preparing isn't terribly difficult, but it requires a look atlong-held insurance assumptions … business model, products,processes, and systems that may be outmoded and built for aprevious era and generation. How does a quoting engine handle asporadic driver? How does a policy administration solution handlecoverage that may turn on and off with a switch, or coverage thatmay only have a duration of two hours? Is an insurer's datawarehouse prepared to handle the data deluge of millions oftelematic devices? For some insurers, these questions may seem liketall hurdles to jump over, but the answers are well worth the timeand investment.

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InsureTech is proving its potential by fueling innovation anddisruption to the insurance industry, through new technologystartups … and insurance and MGA startups. S&P even noted in arecent report that InsurTech has a complementary place in thetraditional insurance world, despite remaining uncertainty in theindustry about how it will function on a wide scale. 

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If you prepare for new insurance models, such as pay-on-demand,pay-as-you-use, or pay-as-you-need, you will be moving yourorganization toward the place where consumer needs, expectationsand demands are heading — particularly with the newgeneration of millennials and Gen Zs that are embracing digitallysuperb, on-demand, sharing economy options in all parts of theirlives.

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It's the dawn of the insurance renaissance. Digitally-connected,innovative and analytically-informed insurers will thrive there.Those who are determined to focus on the customer will grow there.Preparing your business and the underlying systems keeps thewindows of opportunity open and the breeze of market potentialflowing into a healthy organization.

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Related: Here's what the future of auto insurance will looklike

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Denise Garth is senior vice president of strategicmarketing responsible for Morristown, NewJersey-based Majesco, aninsurance industry software and service company. She can be reachedon Twitter @denisegarth or on LinkedInOpinions expressed inthis article are her own. Thisarticle first appeared on the Majesco website and isreprinted here with permission.

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