A Customer-centric Approach to Insurance

Mark Hodes, Founder & CEO, ForeverCar

Mark Hodes, Founder & CEO, ForeverCar

Everyone knows about the highly mature, highly regulated and government mandated auto insurance category. This $200B global industry is dominated by a handful of carriers, each trying to differentiate their products and services. The biggest carriers spend well over $500 million every year on advertising campaigns that attempt to persuade car owners to switch and save.

An adjacent vehicle protection category, mechanical repair coverage (MRC), bears few similarities to auto insurance. The differences are vast ranging from the technical (outside of California, MRC is not an insurance product) to lack of basic consumer awareness- due in part to the absence of Uncle Sam mandating coverage. If it’s optional, it’s not needed and can be ignored.

MRC also differs from auto insurance in selling techniques. When an MRC is sold post vehicle purchase, sellers typically rely on Direct Mail and opaque product marketing. A few sellers haveused dubious sales tactics that prey on unsuspecting consumers. Trust and confidence in this product category is not in a good place. That’s why nearly 200 million car owners, whose manufacturer warranty has expired, continue to opt out of the MRC market. This consumer indifference belies the fact that as vehicles age (the average age of the vehicle fleet is 11 years and growing), expensive and disruptive mechanical repairs are a near certainty.

"Once the consumer experience has been addressed, it’s time to turn attention to the core underlying protection product"

Despite these head winds, the MRC ecosystem generates approximately $20B in annual revenue. This is primarily derived from selling add-ons during the vehicle transaction, where the cost of the MRC is embedded into the auto loan. But what about the rest of the car fleet – those 200 million car owners that are left to deal with the hassle and expense of fixing their car themselves? How can MRC move from fringe product with a jaded past to a consumer service that provides meaningful value and appeals to all car owners?

The answer, as has been the case in countless other categories, is to transform the product into a digitally delivered consumer experience. A service that alleviates the hassle and expense of car repairs. A service that is for the modern consumer who demands frictionless omnichannel shopping, transaction, and service delivery.

The first step in this transformation is to construct a modern platform, focused on the mobile consumer, which seamlessly transitions the consumer from shopper to customer. This platform must also remove the friction of post-sale customer engagement, enabling the customer to easily fulfill their repair needs.

Once the consumer experience has been addressed, it’s time to turn attention to the core underlying protection product. Here’s where massive innovations—indeed transformative changes—are possible. Here’s why.

In the MRC category, the method by whichthe product has been sold to consumers has generated a set of “product features”. These product features were perfectly suitable given the selling environment – you are purchasing a vehicle, you have an auto loan, let’s just add the MRC to the loan. Roughly 4 out of 10 vehicle purchasers agreed to this selling technique. Result – a $20B industry.

The dilemma, of course, is what happens when there is no loan in which to afford an MRC? Here’s where the economics and the consequences of unnecessary frictional costs have wreaked havoc on the industry. You see, in order for the consumer to afford to purchase an MRC, they must spread out their payments via installment plans. This necessitates lenders who manage installment plans and advance monies to various parties—the insurer, the underwriter, the broker, etc.—who have grown accustomed to up-front payments from dealers.

Naturally, finance costs for installment plans are passed on to the consumer. Moreover, with the absence of a dealer distribution network, marketing and acquisition costs come into play, adding to the retail cost to the consumer. Under this model of high prices, only consumers that need coverage remains - the definition of adverse selection. The cycle continues – adversely selected populations force administrators to raise prices or deny claims; customer dissatisfaction increases; customer churn is well above 50 percent; effective acquisition costs sky-rocket. The result - a ruined marketplace.

The only way to break out of this cycle is to re-invent the product, to modernize the way the product is designed and to combine this with a modern shopping, selling, and servicing platform. Product design needs to directly address the deficiencies of the current product and exploit consumer trends, borrowing ideas from successful models in other categories.

All this leads to the inevitable conclusion that MRC product design must conform to a subscription-based model. In this model, customers make decisions every month about the value of the services that are being delivered. If they find no or little value, they terminate their subscription. If the value is apparent, customer satisfaction and retention increase. This has been referred to as the Subscription Economy - where products become services and where companies’ successes are inextricably linked to happy, satisfied customers. A virtuous circle.

This is a radical departure for the MRC category but one that’s essential for market expansion. Those companies that can pivot their business models to subscription-based services will reap the rewards. Of course, the obstacle is how to begin this transformation.

Many companies look to new entrants, who are unencumbered with legacy systems and processes, to shape this transformation. Some even prop up internal investment teams to find the best innovators in their respective categories. Others come to the realization that innovation is difficult from within…so their M&A strategies look to fill product gaps.

Regardless of the chosen path, remaining in neutral in the MRC category is not an option. Unless of course MRC providers and their shareholders are satisfied with low single-digit growth.

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