No Time to Lag Behind

What does the short-term future look like for personal auto insurance in the U.S.? Novarica principal Chad Hersh has authored a study on the market and believes challenges lie ahead for carriers, particularly the ones he refers to as "laggards." Those would be carriers new to direct writing, the Web, or online self-service. "It's an almost impossible situation for them to succeed if they haven't, for example, developed the ability to quote online," he says.

Some carriers have held off on changes because they are agent based and don't want to antagonize their partners. But even the independent-agent-based carriers need to realize the importance of providing potential customers an online quote and turning that request into a lead for an agent, explains Hersh. "If you are not that far, you are pretty far behind," he says.

Carriers that are agent based typically feel customers need to speak to an agent if the consumer expects to get the proper coverage, but Hersh doesn't believe that's an issue today. "In reality, most people are perfectly happy to buy a policy that has their existing coverage limits in it," he says. "The agent-based carriers can say until they are blue in the face that you have to talk to an agent, but the reality is Progressive seems to be doing just fine in gaining market share, as are all the direct writers."

The market will see a shift toward direct-like behavior from virtually all carriers in the next year, Hersh predicts, although not all changes will be transparent. "I think [carriers] are going to be making the business decisions and the technology decisions that will allow them to behave more like a direct carrier even if they aren't selling direct," he says. "You simply can't put off some of these purchases of more flexible core systems such as policy, claims, and billing simply because the market is terrible."

Hersh calls claims and billing "the forgotten service tools." He maintains there are only two times carriers interact with customers other than at the renewal period–one is billing, and the other is claims. "Claims is the one time your customers need you, and if you can't do that well, they are never going to forgive you," he says. "Billing is the one chance to irritate your customer every six months."

Consumers also have gotten used to some flexibility in regard to billing in ways insurers haven't adopted. "If I want a new billing date, I can call my credit card company and ask it to change the date, and it will happily do so," he says. "If I call an insurance company and tell it to change the date, oftentimes it will have to reissue the policy, which is insane."

Other critical issues around billing, points out Hersh, include being able to pay online, being able to pay by credit card, and being able to pay by phone. "Because consumers are exposed to every aspect of every consumer-facing business they deal with, they expect these things now," he says.

In looking out at the three- to five-year period, Hersh indicates changes will be less visible but still important. At the top of the list is microrating. "Right now, you have only a handful of companies that do this well," he says. If an insurance carrier is not microrating, there is a good chance it is not pricing correctly, explains Hersh. "A carrier [using microrating] may not take on as much business as some of its competitors, but the vast majority of [that business] will be profitable," he says.

Hersh also anticipates claims frequency is going to continue to drop in personal auto as law enforcement techniques and safety features improve, which he contends will mean fewer and less severe traffic accidents.

One such safety technology is adaptive cruise control, which is designed to keep a driver a safe distance from the car in front. "That's just a step along the path to fully automated driving," says Hersh. "As those things trickle down into more cars and the mainstream, like the first airbags did, you are going to find everything from severity of liability claims for personal injury to the frequency of claims will drive [lower pricing] things."