On-demand insurance: turning the oak into a reed

By Anais Masetti - 13 May 2021

The emergence of insurtech has been accompanied by the growth of customer-centric insurance products. As part of this trend, on-demand insurance is becoming increasingly popular because it allows customers to access coverage that closely fits their needs in a convenient and flexible fashion.

Convenient and flexible might not be the first words that come to mind when thinking about insurance. But new startups solutions and technologies are enabling a shift in the industry. Let’s delve deeper into the factors and innovations fuelling this shift.

What is on-demand insurance?

Before we look at key trends, it’s worth defining what we mean by on-demand in this context. On-demand insurance means that a person can purchase coverage directly instead of going through a broker or speaking to a representative of the insurer. It generally entails greater choice on the items included in the policy and the duration of it, as opposed to a one-size-fits-all policy. The pricing is adaptive based on usage and/or chosen features of the policy. As such we consider usage-based insurance to be a sub-trend of on-demand insurance.

For example, instead of subscribing to a traditional contents insurance policy, a customer could choose to insure only their home office equipment for a few weeks while they are hosting AirBnb renters. Another popular option is usage-based car insurance where the client only pays for when they’re driving, i.e. only when the asset is at risk.

Such insurance products are mostly distributed through digital channels, such as a mobile app or an online platform. This makes it more appealing to young consumers. In fact, a report by Mitchell highlighted that 93% of American millennials claim to be interested in buying usage-based insurance, as long as prices are competitive.

Why is flexible insurance on the rise?

According to a global survey by Capgemini and Efma conducted in 2019, 35% of individual customers are interested in usage-based insurance. The same study found that 44.2% of business customers are interested in on-demand insurance. So what’s behind this demand?

Matching today’s customer preferences

Due to the digitisation of retail and other industries, customers have gotten used to purchasing products and services online. This allows them to cut the middleman whilst customising their experience. Insurers now have to respond to the same expectations, hence the growth of new digital insurance solutions. 

Indeed, most bank apps now provide a feature to freeze/unfreeze a debit card with a single tap of the finger. Unsurprisingly, consumers wish for the same level of convenience from their insurance.

Today’s consumers love choice which explains why on-demand insurance is gaining in popularity. Only paying for the time during which assets are at risk also appears as a fairer way of pricing insurance. Coupled with a convenient app and simplified forms, on-demand insurance can offer better customer experience and lead to greater loyalty. 

Emerging startups and disruptors

Challenger insurers and insurtech players in general are playing a key role in bringing more on-demand to market. Cuvva is among these up-and-coming challengers, with its per-usage car insurance cover. Trov is also one of the top European startups in the field, offering flexible coverage for single or multiple valuable items (tech devices, musical instruments…). 

Some startups have chosen to focus on professionals and businesses. For instance, Superscript, formerly Digital Risks, offers a range of flexible business insurance. It ranked among the top 15% of startups rated by Early Metrics. Another British startup, Zego, has found success in providing flexible car insurance for gig economy drivers and professional fleets. In March 2021, it became the UK’s first insurtech unicorn by raising $150 million at a $1.1 billion valuation. 

Interestingly, we are now witnessing non-insurtech players entering the arena: N26 announced in April 2021 that it was launching an on-demand smartphone insurance offer, available in Germany through its banking app. The challenger bank is planning to expand the offer to include private liability insurance, home insurance, life insurance, pet insurance and coverage for large purchases.

The downsides of this type of insurance

As analysed by KPMG’s Paul Merrey & Arturs Kokins, on-demand insurance is not for everyone. For someone who needs their coverage “on” for most of the year, flexible policies will usually be more expensive than annual ones. Indeed, insurers have to put a higher price tag on per-usage policies to make up for the greater risks and lower revenues

These two issues represent hurdles in themselves to making on-demand offers widespread. Incumbents are not necessarily motivated to offer on-demand coverage as the on/off nature of such a product means they will have a harder time evaluating risk. If the client only uses the coverage infrequently, the insurer will also earn less than on annual policies. Moreover, there are concerns about greater fraud risks.

Marketing costs needed to educate customers about this new type of coverage and gain visibility in a competitive landscape are an extra hindrance to the growth of flexible insurance.

New technologies supporting the growth of on-demand insurance

Telematics and connected devices could enable dynamic pricing and tailor the risk assessment.

Sensors, IoT and big data

Any technology that can allow accurate tracking of activities can be hugely beneficial for on-demand insurance. Sensor-based technologies, including those used for GPS and IoT, have come leaps and bounds in recent years. Some have found their way into devices we use on a daily basis, including smartphones. The data collected thanks to them can help inform custom premiums, risk assessments and fraud claims.

Indeed, a pay-per-mile car cover will require accurate tracking of the client’s distance travelled and frequency of travel. Aside from traditional telematics, some startups are developing more specialised sensors. For example, the rated startup G-Keep created a device that tracks vehicle behaviour and fuel tank levels to detect fuel theft in truck fleets. On top of this device, it has created an insurance product to reimburse stolen fuel.

While there are privacy concerns, several large insurers have also discussed the possibility of harnessing data from fitness trackers and smart home devices to provide tailored health or home insurance in the future.

AI and machine learning

The use of artificial intelligence in insurance is gradually increasing, which could prove helpful for the growth of flexible offers. As mentioned earlier, on-demand coverage can imply higher risks and lower ROI. Two issues that smart algorithms could tackle.

Machine learning, i.e. algorithms that learn from data and adapt accordingly over time, could enable dynamic pricing and risk assessment that reflects the evolution of a customer’s behaviours and preferences. By automating parts of the underwriting process, insurers could save time and money. In turn, this would make it easier to make these riskier products profitable.

Let’s take the example of car insurance again. Many taxi drivers use a dashcam to record potential incidents and back up their insurance claims. Applying AI to dashcams could allow the automation of footage analysis to verify claims. Not only that, but it could also help inform drivers of potential threats to prevent incidents in the first place. 

Shift Technology is definitely one to watch in this space. The French startup, which develops AI and anti-fraud technology for insurers, raised $220 million at a valuation of over $1 billion in May 2021. Early Metrics had recognised the startup’s strong growth potential in 2018, ranking it in the top 5% of rated startups.

Looking further into the future we can expect the demand for flexible insurance products to keep growing. However, it won’t replace traditional insurance, rather it will complement existing policies. As the digitisation of insurance continues to accelerate, it will only become easier for incumbents and startups to develop on-demand insurance.

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