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Insurance by subscription in a post-pandemic world

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By Graeme Adams, Director at Finity Consultants

Over the past few months COVID-19 has brought waves of uncertainty and disruption to just about every industry in the world, and the insurance industry is no exception.

The pandemic no doubt will have many repercussions and implications for businesses for many years to come.

On the upside it will have the potential to create a more agile, digital and convenient insurance industry with benefits for both insurers and customers.

What is certain is that COVID-19 will lead to lasting change in the way businesses and consumers insure. One likely change could be “insurance by subscription”.

Rather than organising and paying for insurance annually, a subscription-based insurance contract is for a much shorter period, typically one month.

This means that each month a new contract of insurance is entered into, usually by rolling over the terms of the previous contract. Where the contract terms or the insurer’s assessment of risk changes, this is reflected in a different premium in the following period.

For annual policies, automatic renewal each month applies unless either party intervenes. Renewals are automatically sent immediately after payment is received for the current month to comply with the Insurance Contract Act provisions that renewal notices must be available no less than two weeks before renewal is due.

The advantage of a subscription service is that products and services (including insurance) can be bundled together in the form of an account, where the customer can choose to purchase various levels of insurance, mitigation and restoration services.

Insurance by subscription enables an insurer to be more customer-centric rather than the one-size-fits-all product focus being offered by most insurers today.

This customer-focused approach enables insurer services to better reflect the dynamic nature of customer needs and risks. The challenge is that customer needs can change more rapidly than an insurer’s ability to affect change with an annual policy.

Currently it takes up to two years for changes to an insurer’s annual policy to be washed through. For example, if insurance by subscription had been in place at the start of the COVID-19 pandemic, insurers would have been in a much better position to implement an appropriate reduction in motor premiums due to anticipated lower claims frequency.

On average, a policyholder would wait no longer than two weeks to see the premium savings.

The dynamic and customer-centric design that is at the heart of insurance by subscription better positions general insurers to restore trust than the annual product design approach.

This is because subscription services can utilise significant amounts of data (especially where the Internet of Things is used), and the sharing of data requires trust on both sides.

Customers are more likely to trust a company that better reflects their needs and responds more quickly to them.

Over the past couple of years the general insurance industry has already been subjected to a significant amount of regulatory change.

These changes have meant insurers have issued a number of product disclosure statements and supplementary product disclosure statements, resulting in a degree of complexity with respect to coverages potentially over a two-year period.

Insurance by subscription does away with that complexity because policies have much shorter durations.

In a nutshell, insurance by subscription gives insurers and customers much more flexibility, which is needed in our rapidly changing world.

The on-boarding and policy maintenance processes are generally customer-driven so that the customer can use coverage and premium parameters that suit their specific needs.

So how does it compare to annual insurance? When compared to an annual policy, subscription-based insurance has the following key advantages.

Insurers:

  1. Per usage pricing per month is now possible for some products, such as telematics-enabled car insurance. This should result in more accurate pricing at a policy level. In addition, temporary changes to premium, as used during COVID-19, are easier to implement on a monthly basis.
  2. Policy coverage can change or be updated each month if necessary. This could reduce unforeseen exposures in some cases. This would have been useful in the recent rent default cover COVID-19 issue in Landlord policies.

Customers:

  1. Premiums better reflect the underlying risk. For example, a car that does just a few kilometres a week (as measured by telematics data) could generate a lower premium when compared to the same risk but with higher usage.
  2. Subscriptions can be paused as required. For example, a subscription could be paused if the car was kept in a locked garage while the customer was in isolation, or absent for some time.

In the COVID-19 world of 2020 and beyond, a prolonged recession and higher unemployment could result in a surge of risks that are outside normal tolerance levels - think riskier driving, more uninsured vehicles.

Insurance that “goes to sleep” during prolonged periods of inactivity as is currently happening should be highly rewarded with consumer interest.

COVID-19 has lit the fuse under the possibilities presented by new technologies, changing consumer needs and a more demanding regulatory environment.

It will only be a matter of time until agile insurers seize the opportunity to provide more flexible and customer oriented products.