Blog: Is the insurance industry ready for usage-based pricing?

The motor insurance industry is reaching its moment of reckoning. It is being propelled forward by seismic changes in both vehicle usage and driver behaviours – something that has been exacerbated by the last 12 months. 

The pandemic has irrevocably affected almost every industry and motor insurance is no different. It has rapidly accelerated and accentuated market dynamics and customer behavioural trends that were already being felt across the industry. In some cases, it has exposed significant, but previously hidden, weaknesses and vulnerabilities, particularly in how motor insurance companies serve and treat their customers and, conversely, what drivers have come to expect from insurers.

For millions of people, the fact that they have had to continue to pay the same level of premiums on their motor insurance despite a huge reduction in their driving and mileage feels highly unfair. At a time when many industries have gone the extra mile to provide consumers with far greater transparency and flexibility to help them navigate through this challenging period, the motor insurance industry struggled to move quickly in response to changing circumstances. This is in spite of the fact there is technology available today that can help insurers make these adjustments in real-time. 

Fuelling the fires of frustration

It has also reinforced perceptions that motor insurers are still operating in the dark ages when it comes to customer experience. Sure, some insurers offered partial refunds to customers but, given the amounts in question, this was nothing more than a public relations stunt to garner positive headlines and detract from the real issue - namely, that the industry is way behind where it needs to be when it comes to meeting the changing needs of the customer.

The data backs this sentiment up. Research conducted earlier this year found that almost all (97%) of insurers have seen drivers demanding fairer, usage-based pricing during the pandemic. Yet the same study also found that only a fifth (20%) of insurers have made any changes to their motor insurance pricing models in the last 12 months. This puts into context the disparity between what consumers want and what they’re being served, and reveals a shocking lack of action from insurers to address this expectation gap. 

Fair pricing for the here and now

But, despite the current situation, the motor insurance industry knows that it cannot delay the inevitable for much longer - 68% of insurers predict that usage-based motor insurance will become standard within the next four years, with 91% of insurers regarding it as a positive change for the industry. Given that it will help insurers achieve ‘operational profitability’, it’s not hard to see why.

The message is loud and clear - usage-based pricing is not something for the future, but the here and now. It is presenting insurers with a golden opportunity to differentiate in the market by offering great customer experience and fairer, transparent pricing. By focusing on what the customer is clearly asking for, insurers will see commercial benefits through improved retention and customer lifetime value, while simultaneously extricating themselves from the race to the bottom on pricing. Something that investment into the right solutions will realise.

While other segments of the financial services industry, such as retail banking, have embraced new business models and innovated, the same cannot be said of motor insurance. But the shift to usage-based insurance represents an opportunity to reset. It provides a platform for insurers to re-invent their go-to-market strategies and to make fundamental and necessary choices about how they serve customers in the future, not just in terms of a cost structure customers are happy with, but in delivering the open dialogue and engaging experiences that drivers are so desperately seeking.