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Will ‘by the bite’ insurance get buy-in?

29 May 2023

On-demand insurance cover propositions have been slow to catch on, but growing customer engagement, coupled with emerging insurtech solutions, suggests a brighter future ahead.

Genuinely alternative insurance propositions are rare, but on-demand cover that dispenses with annual fixed policies is one concept that’s gradually gaining traction, confirms Paul Merrey, a partner within KPMG's Global Strategy Group, focused on the insurance sector. Stimulated by the growing availability of other on-demand or subscription-based retail products and services, some interesting insurance offerings have surfaced in recent years. As Merrey says: “Consumers will increasingly expect to buy insurance as quickly and easily. They are used to it in many industries, so why not insurance?”

Merrey points to several successful examples in Europe and the US. One start-up insurer that offers flexible car insurance via an app has sold over six million policies. It introduced hourly car insurance and has helped encourage car sharing across its market. In the US, a cloud-based insurtech offers on-demand small business insurance by partnering with managing general agents (MGAs) and wholesalers to distribute white-labelled or co-branded products. Another niche carrier in Europe provides collective cover for cyclists. Instead of charging subscribers a fixed sum, it calculates their monthly contributions – up to a maximum capped amount – based on the collective’s claims. There’s no annual contract, so policyholders can leave anytime. It’s also possible to buy tailored personal protection products in some markets, giving people with active lifestyles the option of adding temporary accident cover, for example.

Insurers rising to the challenge

The increasing cost of living and a hard insurance market suggests that demand for subscription-based and ‘by-the-bite’ coverage is set to grow and that incumbent insurers will rise to the challenge. But it’s not that simple, says Merrey.

“The financial model has to work for insurers − and the operational costs involved in moving to a different platform could be a hurdle. Short term policies can be as difficult to administer as a longer-term policy. Providing flexibility in that way can reduce the profit that’s made,” he explains.

Regulation is another potential stumbling block. Supervisors in the UK and elsewhere are focused on consumer duty and protection, and their controls could potentially be a brake on new pricing models, Merrey believes.

For the above reasons, the pay-as-you-go model might not always be cheaper than traditional cover. “It depends on the type of insurance, says Merrey. “Annual travel insurance might be cheaper than pay-as-you-go even if you only go twice a year,” Currently available telematics-based car insurance isn’t necessarily cheaper either, he adds: In the UK, the telematics option is attractive mostly to younger drivers because otherwise it is difficult for them to buy car insurance at all.

Partnership pays off

But insurers are not inherently resistant to the on-demand model. As Merrey says, sometimes they just need a little help: “Large insurers are willing to trial and test new propositions but the operational challenges are substantial and so they tend to partner with smaller, more nimble firms to avoid making expensive changes to their processes.”

A landmark transaction happened recently when one of the biggest personal insurance providers in the US acquired an insurtech that specialised in on-demand insurance and micro-duration policies. The same insurtech also offered an embedded insurance platform, public APIs, and developer support tools to enable companies to distribute insurance products within their existing digital applications.

Merrey says that more insurers are seeking to upgrade their tech platforms to improve their agility – enabling them to offer more flexible customer propositions. New generation information technology will help accelerate the trend, he believes. Sensors and other Internet of Things (IoT) devices, combined with powerful machine learning algorithms, are already making the argument more compelling than ever.

“Artificial intelligence is the top theme and insurers are excited about its potential application in underwriting and pricing, for example. It follows that AI could transform and enable the sort of cost effective, on-demand experience that their customers are looking for.”

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